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Become a Job Costing Wizard

Business success doesn’t just depend on your ability to fix cars; you also need to know your numbers in order for your business to be profitable.

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Mark R. Clark is owner of Professional PBE Systems in Waterloo, Iowa. He’s a popular industry speaker and consultant and is celebrating his 32nd year as a contributing editor to BodyShop Business.

Mention “job costing” to non-accountants and most folks will immediately and resolutely tune out whatever number-intensive information comes next. I can sympathize; lots of multiplication, decimal points, percentages and medians sounds like no fun at all. Can’t we just fix cars?

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Thousands of body shop owners do indeed just fix cars and let someone else crunch the numbers. Or, worst case, they just fix cars and hope the numbers somehow leave something at the end of the month.

In my 43 years in our industry, the most successful shop owners I’ve met have all understood how important numbers were to a profitable business. In my opinion, the most useful measurements for any businessperson come from comparing their individual firm to industry benchmarks. Industry benchmarks are established when lots (the more input, the more accurate the benchmark) of similar businesses calculate the same set of business numbers using the same math formulas.

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Benchmarks
Collision repair benchmarks are available from numerous sources. Paint manufacturers, trade associations, published surveys, your local PBE jobber and BodyShop Business can all provide accurate benchmarks about successful collision repair. Not surprisingly, their individual yardsticks closely mimic each other as they’re all gathering data about the same industry. These benchmarks are almost always within a few percentage points of each other.

Reading all about some other body shop’s median numbers for some statistic is meaningless unless you know your own shop’s number for the same statistic.

All you need is a pocket calculator, the math formula and some paper to jot down the answers (and enough uninterrupted time to gather the data and do the math – not to mention the additional time to make the changes necessary to improve your shop’s results.)

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Too busy fixing cars to make any money at it? The answers possibly lie in the numbers.

Close Rate
There are no shortages of collision repair issues to compare, but one that always comes to the top of my list is close rate. It won’t matter how cool your shop’s equipment is or how fast your techs work if the car is repaired in someone else’s shop.

The formula is simple: the number of ROs completed divided by the number of estimates written for some time period (week, month, year.) In BodyShop Business’s 2013 Industry Profile, survey respondents said that 62 percent of their written estimates became repair orders. Surely your shop is as good as the average shop out there, right? Find out right now; pull last month’s estimates and last month’s finalized invoices. Divide ROs by estimates. Higher numbers are better!

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Parts to Labor
Parts-to-labor ratio is another key body shop benchmark. BodyShop Business’s 2013 Industry Profile said the average parts-to-labor is 75 percent. Selling more crash parts and less labor is a very profitable repair strategy if there is new work waiting for the stall. If there is nothing outside, repair everything (until you spend so long on the repairs that you lose your DRP status!). Profitable shops often have P-to-L ratios in the mid-80s, and top shops push 100 percent (1:1 P-to-L).

How does your shop compare? Simply total up your labor sales and your parts sales for a given time period. Divide the parts sale by the labor sale. Using the 2013 BodyShop Business survey numbers: 41 percent of the sales in parts and 55 percent of the sales in labor, so 41 divided by 55 = 74.5 percent parts-to-labor ratio.

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Sales Mix
Another benchmark that naturally follows the parts-to-labor calculation is sales mix. What does your body shop sell? One simple answer says you sell labor, parts, paint and material, and sublet services. What percentage does each category contribute to 100 percent? The answer is your sales mix.

Many industry sources offer a benchmark for body shop sales mix, and they’re generally within a narrow range. Labor sales are typically 45 to 55 percent of the invoice, parts sales are 35 to 45 percent, paint and material sales are 5 to 10 percent and sublet is whatever is left over to make 100 percent. One thing your paint jobber will be happy to remind you about is that your shop’s cost on paint and material is typically (yet another benchmark!) 5 to 7 percent of shop sales. If your estimators are only selling 6 percent of the ROs in P&M, you’ll never make any money, no matter the jobber’s discount. Do your best to add refinish hours to future repairs until P&M is 9 to 10 percent of your sales to ensure that you’re making a nice gross profit.

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How will your shop find out its sales mix percentage? Simple. Pull six consecutive estimates written by any individual estimator. Simply total all the labor dollars from all six, then all the parts dollars, P&M and sublet. No sales tax. Total them all (L+P+M+S=100%) and then divide each category by the total of all the invoices.

For example, I grabbed six estimates from any drawer in the file (as long as they were all written by the same author). The six sheets totaled $14,402 before sales tax. Labor sales totaled $6,604, parts were $5,480, P&M was $1,265 and sublet was $703. I took my calculator and divided each category by the $14,502 total. In this example, labor was 47 percent of the total, parts were 39 percent, P&M was 9 percent and sublet was 5 percent. These all were within the industry benchmarks and resulted in a pretty profitable P-to-L of 83 percent. And at 9 percent of sales, the shop is making good money on paint.

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Numbers and Insurers
Never forget that the insurance industry is based on number crunching. They employ super sophisticated math to predict the probability of a loss, the severity and the frequency. From those results, they establish a market competitive dollar cost for an annual insurance premium. They have buildings full of actuaries who have tracked all the insurance claims their company has ever settled. From that vast resource, they were able to find a measurement benchmark for every conceivable body shop issue. Now that the entire auto claims industry seems headed for repair assignments based on scorecards and demonstrated performance and not the shop’s relationship with the local adjustors, knowing how your shop compares to their standards is key to getting more insurance work.

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Gross Profit
The job costing math mentioned in the beginning of this column takes just one more trip to the calculator. For each RO category sale previously mentioned ($6,604, $5,480, $1,265 and $703), multiply by each item’s gross profit. Got a benchmark for each sale’s gross profit? Yup. Shops should make 55 to 60 percent on labor, 25 to 35 percent on parts, 25 to 40 percent on paint and whatever they will let you charge these days (10 to 15 percent?) on sublet. Add the gross profit dollars for each category and you have successfully job-costed that invoice.

Take Some Time

Take some time each week to compare your shop’s performance to industry benchmarks. While someone in your shop certainly needs to be focused on fixing cars, someone better be managing the finances as well. Set your initial goals to be at least as good as the benchmark, and set your longer term goal to be best!

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Mark R. Clark is the owner of Professional PBE Systems in Waterloo, Iowa; he is a well-known industry speaker and consultant. He is celebrat-ing his 25th year
as a contributing editor to BodyShop Business.

 

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