Why do some shops boast high paint and materials gross-profit percentages, while others just hope to break even?
So often I meet with clients and shop owners and the discussion quickly turns to paint and materials costs and then their profitability (or lack of it). Sometimes, the “first liar never has a chance,” and sometimes some very good ideas and information are exchanged. The key is being able to tell the difference.
Why is it that some organizations boast high paint and materials gross-profit percentages, exceeding 40 percent and costs at 5 percent or below (no matter what paint line they use), while others just hope to break even (with the same paint line)?
From examining facilities worldwide, I’ve reached one conclusion: Those who succeed in getting the highest profits and reduced costs manage the department well and understand the factors that control their profitability in this department. They also know that it has little to do with what they pay for the products they use or what brand they select.
What Causes Loss of Profit or Excessive Costs?
So what causes one shop to have great cost containment and high profits when another is struggling in one or both areas? There are four main factors:
- Knowing exactly what’s included and not included in paint and material costs.
- Having accounting practices that accurately post sales and costs in the appropriate accounts.
- Taking accurate monthly inventory.
- Maintaining a high standard for waste control, housekeeping, and paint and materials management.
Let’s examine all four a little closer.
Knowing What’s Included
Paint and materials costs and profitability have a great deal to do with what you define as “paint and materials.” To some, it includes a very large “bucket” that gets dumped with so many charges that aren’t paint and materials in the real sense, that it’s no wonder profitability and costs are unacceptable. In some cases, the revenue provided in paint and materials is robbed to offset other deficit revenue areas. Though this seems to be more common in small dealership body shops done to balance the repair order prior to input into the accounting system it’s done by independents, too. This accounting is your own business, but don’t expect to be able to compare apples to apples if you’re doing such creative accounting.
We often find in these cases that the owner/manager usually doesn’t know these “adjustments” and “charges” are going on. It’s the bookkeeper, data-entry person or accountant who makes the call.
I’ve provided a “Paint and Material Distribution Guide” (see pg. 116) of what I consider paint and materials for this article. There are a number of items that could’ve been itemized on a repair order line, so these would also need to be included in the paint and materials revenue since the costs surely will be. Whether you decide to put hazardous waste disposal or any other line-itemized charge in paint and materials is up to you; just be sure the revenue also goes there. Costs and sales must be in the proper accounts for any accounting or benchmarking to be beneficial.
Accurate Accounting Practices
If revenues and costs aren’t being tracked properly and placed in the proper, corresponding sales account and cost account, then all bets are off.
We’ve worked with a number of progressive jobbers and paint companies to provide clear direction relating to this area of invoicing customers’ products. They’ve even set up different accounts for a customer one for paint and materials, and additional accounts for other items. Some may have a regular paint and materials account and a shop expense account where items such as booth filters, small tools like sanding pads and even safety items are billed.
This can be as simple as two accounts or, in some cases, as many as five different accounts. The key on the supplier’s side is to accurately invoice each order to the correct account and place the customer’s accounting code for quick, accurate accounting distribution.
If multiple accounts aren’t done, then items should at least be listed on separate invoices with the proper account codes shown for the customer. Bottom line: The accounting can make all the difference in the world regarding what the accounting reports print out.
Accurate Monthly Inventory
Along the same lines of proper accounting, the inventory you carry each month does affect your costs within that accounting period. This is especially true if you place stock or large orders at times that could increase your inventory at the end of that period.
If a large order for paint backup tints, and a few cases of clear, hardener and reducer hit at the end of the accounting period, it could mean $2,000-plus added to the costs of materials. However, they shouldn’t be costed at this point since they haven’t been used.
For example:
Total revenue sales = $100,000 for the month
Total cost of materials = $9,000 for the month from the statement
Cost to sales percentage = 9%
Total materials revenue = $10,000 for the month
Gross profit for this period = 10% below acceptable standards
But this included a large stock order of tints, clears and other related projects to get ready for a big hail storm that just occurred. The order arrived on the 30th of the month, and the invoice was for $2,350. By subtracting the $2,350 from that month’s statement, you’ll be given a more accurate cost to sales and gross profit of:
Total revenue sales = $100,000 for the month
Total cost of materials = $9,000 for the month from the statement
Less stock order = $2,350 purchase made the 30th
Adjusted cost of materials = $6,650
Cost to sales percentage = 6.65%
Total materials revenue = $10,000 for the month
Gross profit for this period = 33.50%
But taking into consideration those materials purchased on the 30th isn’t all that needs to be done to change a high-cost-to-sales-percentage back to an average cost and a low gross-profit level to a favorable one. In reality, you need to perform a complete physical inventory and reduce costs by everything that hasn’t been consumed.
This becomes a little too complicated for some. In fact, we’ve established certain lesser criteria to consider the materials consumed (or not), which meet the needs of the specific shop. For one shop, a material was “consumed” as soon as a technician put it in his storage cabinet. The more detail you define to this parameter, the more accurate your analysis will be.
In fact, the most accurate method of tracking your true costs for this area would be to take all your purchases and subtract your “change in inventory.” This would account for large orders at the end of the month and also for when your inventory level goes back to normal. There are countless ways to do this, but I don’t have the space to detail methods.
Maintaining High Standards for Waste Control & Housekeeping
The biggest contributing factor to profitability and costs of paint and materials is in the hands of those who use the products. This one area can change the costs and profitability equation by great percentages.
Is your workplace focused on this?
Every company needs to have organization to control these waste factors. In fact, the extra paint overmixed and not used is also rightfully inventory and should be deducted from costs. This is whether it’s stored (for future use?) or thrown into the waste container and hauled away. The latter happens most often, costing you twice (wasted product and disposal costs).
We’ve actually seen and worked with facilities that have a “mixed paint” inventory adjustment every accounting period that exceeds $2,000. Of course, they say, “We use those leftovers on future jobs.” In this particular case, the number and quantity of products in this category increased by at least 15 percent monthly. In fact, in just a few short months, all the shelves, cabinets and cubby-holes were filled with partially filled cans. This is not using the inventory; it’s a wasted cost to the company.
This is one area in which we’ve had a great deal of opportunity to look at in a lot of companies worldwide. It’s even prompted us to develop a program to implement in this area of the business:
The SMART Program
It’s a very important task to reduce and eliminate waste in any phase of your operation. For this reason, the development of a system to accomplish this goal with paint and materials is also important.
This system is what we call the SMART Program:
S – Supply organization
M – Monitoring and measurement
A – Abolish waste
R – Review and reward
T – Training and technology
Supply Organization
- Centralize supply inventory to limited and secure locations.
- Standardize and organize working inventory storage for each technician.
- Reduce product variations down to as few as possible. Don’t have multiple brands of the same product.
Monitoring and Measurement
- Implement log sheets that track usage and distribution of all inventory.
- Implement computer scales (using RO and password) to provide usage reports.
- Implement taking monthly and quarterly inventories.
Abolish Waste
- Improve the mixing process to reduce what’s mixed to match what’s actually needed.
- Eliminate storage locations to only a few shelves and to color family containers.
- Improve the repair process to use the most effective use of materials.
- Use recycling equipment to reduce hazardous waste.
Review and Reward
- Perform a monthly analysis of costs and profitability after adjustments.
- Establish a “Waste Buster” committee to get staff involved with ideas and support.
- Provide quarterly reviews for all involved including sales, accounting and technical staff.
- Establish an incentive system to share the profitability.
Training and Technology
- Provide continuous internal system training to improve process.
- Provide proper product training from the manufacturer.
- Introduce and provide new product training always look for better solutions.
Each one of these modules requires a commitment for you and your company, and it’ll require change that your entire organization must adopt. Ultimately, it’ll almost become a self-managed system because the staff has participated in the development of the program by way of committee involvement. They’re reviewed quarterly on their participation in the program, and an incentive program to reward all has been provided.
I can’t get into every detail of this program, but it’s available on The BOSs at www.TheBOSs-Online.com.
The Benchmarks
Now that you understand the basis of benchmarks and how your costs and revenue can be affected, it’s time to look at the targets you want to achieve. We call these benchmarks. Your operation and how well you’ve already consistently incorporated all the prior information will determine how close you may already be to the following benchmarks:
Paint and Materials
Revenue: The total paint and materials revenue should generally represent approximately 10 percent or above of your total sales revenue. This is calculated by taking all your paint and materials revenue in a given accounting period, such as a month or quarter, and dividing it by the total sales revenue (total turnover) for that same accounting period, excluding taxes collected. This percentage should be calculated to two decimal points for better accuracy.
This is not only controlled by the paint and materials rate you charge, as many shop owners (and clients) have complained and moaned about for years. Many believe there’s no room for improvement in this area because it’s “out of their control.” That’s so far from reality but it’s difficult to convince closed minds sometimes.
Why? Too often we forget about operations where we can line item something that would be in paint and materials because we’re too busy to worry about it. If you’re an estimator, your job is to ensure the shop receives proper revenue for each job. No one else will or should be expected to determine the repair needs. You’re the expert in this area. It’s your job to make sure sufficient revenue is received. And this doesn’t mean cost shifting. Write it right and have the skills and desire to negotiate it to your real needs.
Many shops we’ve worked with have averaged more than 11 percent revenue for this area. This is an important start for those who are having paint and materials profitability problems.
Cost to Sales of Paint and Materials: Another benchmark to look at is the paint and materials costs to your total sales. This is calculated by taking your total paint and materials costs for a given accounting period, such as a month or quarter, and dividing it again by total sales revenue (total turnover) for that same accounting period.
Using the definitions for paint and materials from our distribution chart, you should be able to maintain your paint and material costs at 7 percent or below if your shop is doing $1 million or less in annual sales. As your shop sales volume increases, this can decrease to the 5 percent range or below.
Why the difference? First, there’s better purchase prices available as your shop volume increases. And in most cases (but not all), as your shop volume increases, you implement better systems for management and accountability.
I’ve seen many claims made to even lower costs to sales percentages, but first let’s refer back to the paint and materials distribution chart to identify what’s being counted. Many times you hear 3.5 percent to sales costs, but I’ve always found that it wasn’t for all the materials on the distribution chart. It’s often just for what’s commonly called “liquids” paint, reducers, additives and primers.
These two benchmarks paint and materials revenue, and cost to sales of paint and materials are the key factors to monitor regularly and what determines your gross profit level for this department. Though many publications publish gross-profit benchmarks (which need to be looked at), these two benchmarks are what control your gross profit.
Commonly, clients we’ve worked with achieve anywhere from 35 to 50 percent gross profit on paint and materials, as defined in this article. That’s not bad. And with the systems we implement, the technicians benefit as well.
Every Little Bit Counts
Great emphasis has been placed on paint and materials the last few years, and the paint companies and their distributors have taken a beating. Granted, the cost of your products in this department does have an effect on your profits, but not as much as other areas of your operation.
As you well know, this department is only about 10 percent of your revenue and generally 5 to 7 percent of your costs. So why have we concentrated so much here on paint and materials when your parts purchases are 35 to 40 percent of your sales and average 30 to 35 percent of your costs? Obviously, a smaller improvement in parts would increase your bottom line much more effectively.
True. But any system that you implement to make your operation more profitable is always worth your while. And you’ve got to start somewhere.
CLICK HERE FOR THE PAINT AND MATERIALS GUIDE
Contributing Editor Tony Passwater is president of AEII, a consulting, training and system-development company. He’s been in the industry for more than 27 years; has been a collision repair facility owner, vocational educator and I-CAR international Instructor; and has taught seminars across North America, Korea and China. He can be contacted at (317) 290-0611, ext. 101, or at [email protected]. Visit his Web site at www.aeii.net for more information.
To calculate: Paint and materials revenue in a given accounting period the total sales revenue (total turnover) for that same period, excluding taxes collected. Calculate this to two decimal points for better accuracy. |
