The price of gasoline is hovering around $4 per gallon, and miles driven have dropped dramatically. The U.S. economy is in a definite slowdown. Mortgage foreclosures are at record highs, and real estate values are dropping like a rock. Unemployment is increasing and there’s uncertainty over our political future. It should come as no surprise that body shops are reporting slow sales.
Many shops are reporting substantial slowdowns. Some shops are reporting 20 to 30 percent reductions in sales from just one year ago. The collision repair business has always been tough. Now, it seems that our business has just gotten tougher.
While sales have dropped, the cost of doing business has increased. Our energy and material costs have increased with the escalating price of oil. Vendors have had no choice but to pass on their increased cost, particularly the increased cost of delivering parts, paint and materials, through fuel surcharges.
The insurance industry doesn’t seem inclined to help us out. I’ve not heard of any carriers offering to increase labor rates to offset the increased cost of business, nor have I heard of many adjusters asking shops to pass along those fuel surcharges. On the other hand, tales of insurance abuse of collision repair facilities are on the increase. Friction between the DRP shops and non-DRPs is increasing.
In short, it’s ugly out there. No one knows when things are scheduled to improve. I’ve heard some say, “We’re well positioned for the recovery.” But what if this is it? What if there is no recovery in the near future? What should shop owners and managers do to survive this downturn? Let’s look at some “survival” strategies.
Survival Strategy #1: Reduce Breakeven Point
When the going gets tough, it’s time to dig into your business’ numbers. Review your profit and loss statement. If you aren’t comfortable with the financial side of the business, make an appointment with your accountant to get a handle on your numbers.
What is your “breakeven point”? Reduce it. Whatever it is now, it needs to be lower.
“Breakeven sales” or “breakeven point” is one of the most important key performance indicators (KPIs) for any business. Breakeven represents required sales to pay for overhead expenses. Overhead expenses are those nasty little expenses that we have to pay, even if we don’t repair a single vehicle: rent, management and staff wages, equipment and software lease payments, interest, utilities and insurance, for example.
Reaching your breakeven sales point doesn’t mean you’re profitable, it just means you’re not losing money. The formula for figuring it out is: Overhead $’s / Gross Profit %.
Example: ABC Auto Body has overhead of $45,000 per month and an overall gross profit (GP) percentage of 37. Dividing the $45,000 overhead by the 37 percent GP yields a breakeven point of $121,631.63. In other words, ABC Auto Body must sell $121,631.63 each month to generate sufficient gross profit dollars to pay for overhead.
If ABC Auto Body is selling an average of $130,000 per month, the shop is profitable and it’s operating above its breakeven point. But what happens if there’s a 10 percent decline in sales? Sales would drop by $13,000 to $117,000 per month, which is below breakeven. In other words, the business isn’t producing sufficient sales to cover overhead expenses and is losing money. No business can run with sub-breakeven sales for a sustained period without going bankrupt.
Look at the breakeven formula. There are only two variables: overhead and gross profit percentage. The only ways to reduce the breakeven point are to reduce overhead and/or increase gross profit percentage. Let’s look at how to do each one.
Reduce overhead. It’s time to meet with the accountant. Go to your profit and loss Statement (or income statement, or operating statement) and review the items listed as overhead. Go through those items line by line and identify the person or business receiving the money for that line of expense.
Once you’ve completed your list of overhead expenses and the people or companies associates with those expenses, contact each of them and negotiate any possible reduction in the cost. Here are a few easy examples:
- Contact your insurance agent (or agents) and look for ways to reduce your insurance expenses. Look for ways to reduce all insurance expenses by increasing deductibles, adjusting coverage and shopping competitive carriers. Shop your medical insurance on an annual basis you’ll receive the most competitive pricing in the first year or two of participation. Ask all of your insurance agents: “How can I reduce my insurance expense without sacrificing service and coverage?”
- Review your laundry and uniform service. Ask your uniform company the same question as the insurance agents: “How can I reduce my laundry expense without sacrificing service?” If adjustments cannot be made, shop around for a better price.
- Go over your rent or lease payments. Ask for a lease reduction or to freeze the rate for a year or two in ex-change for a longer term lease. Do you really need all that space? Can you implement lean processes to reduce the required footprint of the shop? Perhaps you can sublet some of your space to generate income or simply vacate some space and re-negotiate the lease on the remaining space.
- Review all loans and leases. Meet with your banker to see if there’s a way to reduce monthly obligations through refinancing equipment loans and leases. Perhaps you can combine existing loans and leases into one lower-cost commercial loan. Look at your estimating and computer system leases. Do you really need multiple estimating systems? Do you have multi-user leases in place, and can you reduce the multi-user agreements?
- Review charitable donations. If the business is failing, the little league won’t get anything so it may be better to reduce support now to save the company.
Here are some tougher examples:
- Staff reductions hurt but may be necessary. Is your management staff appropriate for your sales volume? Can staff be reduced? Can the parts manager be replaced with an improved “lean” parts handling system? Can a production manager be replaced with a working foreman?
- Review benefit packages. It may be time to restructure your benefit packages. You might have to adjust the employees’ share of medical coverage or reduce the company contribution to a 401K. You may be forced to release long-term employees who have large benefit packages if they refuse modification of their medical, dental, vision and 401K packages.
Look at the examples set by airlines and title companies. Those industries, under huge pressure to regain profitability, have had to reduce service, cut staff, reduce benefits and execute many other drastic steps to simply survive.
Example: ABC Auto Body reviewed its overhead items line by line and negotiated reductions wherever possible. Reductions in insurance and benefits were achieved. Leases were reviewed, loans were restructured and the company sold a company car which eliminated that expense altogether. As a result, overhead was reduced by $2,000 per month to $43,000. The impact to the breakeven point? Divide the new overhead of $43,000 by the gross profit percentage of 37 and the new breakeven point is $116,216.22. Now ABC Auto Body could withstand a 10 percent drop in sales and still remain marginally profitable.
Increase gross profit percentage. Gross profit percentage is another key financial driver in any business. While gross profit percentage (GP%) can be calculated for any profit center (body labor, paint labor, parts, paint materials, etc.), the number used in calculating the breakeven point is the overall GP %. To calculate GP%, divide gross profit in dollars by total sales and multiply by 100 to state as a percentage.
Example: ABC Auto Body has total sales of $117,000 and gross profit dollars of $43,290. To calculate GP%, divide $117,000 (total sales) by $43,290 (gross profit dollars) which equals .37. Multiply that by 100 to state as a percentage: 37.
To increase GP%, we need to look at the math. Gross profit is the result of sales less the cost of goods sold. The only ways to increase GP% is to increase sales without increasing the cost of goods sold or to reduce the cost of goods sold while holding sales steady. Basically, we’ve got to figure out how to produce our sales for less money.
Collision repair shops sell four basic items: labor, parts, materials and sublet. To increase GP%, we must look at each item and try to find a way to reduce our cost for
Labor cost provides the greatest opportunity to increase GP%. Moving hourly technicians to a flat rate system or creating multiple flat rates are ways to increase labor GP%. If possible, in a flat rate environment, increasing door rates while maintaining the current flat rate will increase labor GP%. Assigning jobs based on skill level and paying based on skill level will provide increased labor GP% as well.
Parts vendors may be able to provide additional discounts, which would result in improved parts GP%. Keep in mind, however, that they’re experiencing difficulties in the slow market as well so those discounts may be tough to find. One quick way for shops to improve parts GP% is to get paid for many items that currently aren’t being charged for: clips, nuts, bolts, alignment shims, sound deadening pads, panel bonding adhesive, etc. Since you’re using the items anyway, selling those items will result in an increased parts GP%.
Materials coming from your jobber also need to be sold by the shop to increase GP%. Look for ways to reduce material inventories, and use products correctly to reduce costs and increase GP%. Since your jobber is experiencing increased delivery costs, try to reduce the number of orders. Perhaps a bi-weekly stock order, paid at the time of delivery, will result in added savings and increased GP%. If not currently in place, it’s common to receive a 1 or 2 percent discount for prompt payment, usually by the 10th of the month. Take advantage of that!
Example: ABC Auto Body has taken action to improve GP%. It has restructured its production team by replacing a poorly producing tech with a mid-level tech who’s paid a lower flat rate than the journey level techs. Additionally, the shop has worked with its jobber to reduce redundant inventory items and has agreed on one major stock order per month, paid on delivery, at an additional discount. Finally, it has focused on getting paid for clips and miscellaneous materials and parts that had been frequently missed. These actions have resulted in an improved GP% of 39 from the previous 37.
The new breakeven point? Divide overhead ($43,000 from our example above) by the new GP% of 39, and you get $110,256.41. The shop is now as profitable as it was before the 10 percent volume reduction.
Survival Strategy #2: Sell More Work By Increasing Close Ratio
What’s your shop’s close ratio? That’s another KPI worth following closely.
To calculate close ratio, simply divide the number of repair orders over a set period of time by the number of sales opportunities for that same period of time.
Note that I said “sales opportunities,” not just estimates. Count every potential customer who walks in the front door as a sales opportunity, even if you don’t write an estimate.
Example: ABC Auto Body counts sales opportunities and repair orders for a month. At the end of the month, it finds that it had 110 sales opportunities and wrote 58 repair orders. The average repair order is $2,017.25.
To calculate close ratio, divide the repair orders by the 110 sales opportunities and multiply by 100 to state as a percentage: (58/110) x 100 = 53%
If ABC Auto Body would implement improved sales techniques to increase the close ratio to 65 percent, it would be selling 71.5 ROs from the same 110 sales opportunities. At an average RO of $2,017.25, its monthly sales would be $144,233.38! Not bad, considering it was doing $130,000 before the sales slump. The fact is, the best way to increase sales for most collision repair shops is to improve sales skills. Yes, you very well may be able to sell your way out of a receding market. Close ratios in excess of 80 percent are achievable.
Formulas for Success
BREAKEVEN POINT: Overhead $’s / Gross Profit %
GROSS PROFIT %: Divide gross profit in dollars by total sales and multiply by 100 to state as a percentage.
CLOSE RATIO: Divide the number of repair orders over a set period of time by the number of sales opportunities for that same period of time.
Survival Strategy #3: Sell More Stuff! (Up-sell)
Every customer that walks in your front door has two jobs for you. The first job is “the loss.” The second job is whatever else, parts or service, he or she may need. Our job is to get paid for what we do to repair “the loss,” then see if we can sell him or her something else.
To maximize reimbursement for repairing the loss, we need to improve our estimating and negotiation skills. Enroll yourself in a damage analysis class and take a class on negotiations. At the very least, review the P-pages for not included items and read a book on negotiation skills.
To increase added sales, create a list of things or services you can offer for sale in addition to “the loss.” Items such as an upgraded detail, oil and filter changes, alarms and alignments can frequently be sold directly to the customer, in addition to “the loss.”
Survival Strategy #4: Increase Low-Cost Marketing Activity
If your close ratio is below 70 percent, the first, best and cheapest way to respond to a slowdown is to learn to sell. If your close ratio is higher than 70 percent, improved marketing is needed.
But, as we’ve already seen, this is not a time to increase overhead, and marketing is an overhead expense. So focus on low-cost marketing ideas. Pick up a copy of the book, “Guerrilla Marketing,” which is full of low-cost marketing ideas.
Focus marketing at your customer base. Most ignore this valuable asset. Use low-cost marketing ideas focused on your existing customer base to increase door traffic and boost sales.
Don’t Survive Thrive Most of the strategies discussed in this article are things we should be doing all of the time. As business people, we should always be looking for ways to increase our sales and improve marketing. We should constantly have an eye on the financials and look for ways to increase profitability and efficiency.
Slow periods happen. Our business plans should include contingencies for periodic downturns in business. Keep in mind that there’s a significant overabundance of collision repair shops in the U.S. In fact, 20,000 $2-million-per-year collision repair shops are capable of repairing every damaged vehicle in the U.S. today. Currently, there are more than 40,000 body shops.
Common sense tells us that the slow economy and high prices being charged for gasoline and other energy may be the catalyst for the closing of significant numbers of collision repair shops in the near future. Those that make it will be in a unique position to thrive, not simply survive.
Hank Nunn is the president of H W Nunn & Associates, a collision industry consulting company. He has more than 30 years’ experience in the collision industry as shop owner, technician, jobber store owner and consultant. Nunn is currently sales and marketing manager and facilitator for DuPont’s SMART Seminar Series. He may be reached at [email protected].