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Finding Your True Cost of Business

It takes more than a coin toss to decide which jobs your shop should accept. It’s about understanding the cost of doing business. If you’re not measuring the profitability of repairs, how do you know the repairs are even profitable?

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Earlier this year, I gave a seminar about corrosion protection to a number of shop owners and, as usual, we got off the subject and discussed problems that plague our industry. During the conversation, I noticed the shop owners lacked an understanding about their costs of doing business. If you’re going be successful in the next millennium, however, you must understand what it costs to conduct business.

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A Tale of Two Businessmen
All businesses in a capitalist society utilize this simple formula: Sale – Cost = Profit. That’s all there is to it.

Using that formula, let’s take a look at two businesses:

An ice-cream vendor would visit our shop every afternoon around break time. He always had a smile and he knew his clientele. (He knew I was partial to drumsticks.) He had sales: ice cream bars. And he had costs: ice cream bars, dry ice and depreciation on bells, the cart and tires. At the end of the day, the ice-cream vendor would add up his sales, subtract his costs and, hopefully, end up with a profit.

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For some time, I thought he took the money, put it in his pocket and then moved on to the next stop. But one day, I saw him writing in a book, and my curiosity got the best of me. It turned out he kept an accurate record of each visit, knew his break-even point and assigned a rating to each shop. I later discovered the gentleman was a retired CPA and was selling ice cream only because he needed the exercise and he loved interacting with customers (he said it kept him young). He was a true businessman.

Here’s another story:

I know a shop owner who ran his business for 24 years without measuring all areas of that business. He was a procrastinator, and when he closed his facility, all he had to show for his efforts were a tool box and two half-completed 356 Porsches. What a waste, working for 24 years and walking away with nothing to show for it. This could have been prevented if the shop owner had a set of written goals and a program to implement them.

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I’ll let you in on a little secret: That shop owner was me. I told you my story to illustrate that it’s not too late to change, which is what I did four years ago after reading a book called, "The Game of Work" by Charles Coonradt. So don’t tell me you can’t teach an old dog new tricks. I’m proof it can be done.

Both stories illustrate one thing: No matter how simple or complex a business is, everything can be represented by the Sale – Cost = Profit formula.

The Cost of Business
Let’s examine two repair scenarios to determine which one makes more business sense.

1. A late-model vehicle needs a front bumper.

• Your door rate is $30 per hour.

• The estimating guide gives one hour for overhaul and three hours for refinishing (techs receive 40 percent of the time).

• You can sublet the work to a recycler (sale, $220; cost, $110) or your tech can spend four hours repairing the bumper.

What would you do and why? Let’s look at some numbers.

Procedure

Sublet Sale

Cost

O/h bumper

$30

$12

Paint

$90

$36

Sublet

$220

$110

Profit

$182

 
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Procedure

Repair Sale

Cost

O/h bumper

$30

$12

Paint

$90

$36

Sublet

$120

$48

Profit

$144

 

Based on the numbers, the choice is obvious. You’ll make more profit if you sublet the work.

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But we need to look at other factors, as well. Suppose the customer arrives at your facility Monday at 11 a.m. (You asked him to be there at 8 a.m. so you’d be able to return his car by Tuesday afternoon.) The recycler doesn’t pick up the bumper until Tuesday, which means it won’t be returned until Wednesday. Now, you have to tell the customer his car won’t be ready until Thursday. Although he arrived late Monday morning, you’re the bad guy.

On the other hand, you could have completed the repairs and primed the bumper Monday and then sanded, painted, assembled and delivered the vehicle as promised Tuesday.

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How much does the two-day delay cost? On the repaired bumper, the paint department would have to prime and apply basecoat to only the repaired section and then clear the entire bumper. With the recycled bumper cover, the paint department would have to prep, apply basecoat and then apply clear to the entire cover.

Also keep in mind that you can control the quality of in-house repairs, but you’re at the mercy of the recycler if you sublet. (If the recycler doesn’t properly repair the cover and it comes back to your shop for a re-do, how much will that cost?) The bottom line is to know your entire cost.

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2. A late-model vehicle with damage to both fenders and the hood. Should the parts be replaced or repaired? Keep in mind, the tech gets 40 percent of the labor and there’s a 25 percent discount on parts.

• Repair parts:

20 hours at $30 per hour = $600

Cost of labor = $240

(600 – 240) / 600 x 100 = 60 percent gross profit

• Replace parts:

5 hours R&R at $30 per hour = $150

Sale on Parts = $450

Cost of Labor = $60

Cost of Parts = $338

(600 – 398) / 600 x 100 = 34 percent gross profit

Looking at the numbers, your first thought would be to repair rather than replace, but look at another calculation — gross profit per hour. To calculate this figure, divide gross profit by hours on the job. In our repair example, $360 (gross profit) divided by 20 hours (repair time) equals $18 per hour. In the replace example, $202 (gross profit) divided by five hours (R&R time) equals $40.40 per hour.

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If you were to replace parts on two additional jobs in the 20 hours needed for one repair job — let’s assume you average $30 gross profit per hour — you’d make a $600 gross profit instead of $360. Although this is a simplified example and many factors enter into the equation, you must know all your costs. If you don’t, you’ll be left behind.

Burying Your Profit
I’m sure this has happened to all of us. A customer comes into your shop and says, "If you’ll save my deductible like the shop up the street, I’ll leave my vehicle with you because you do great work."

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Ethical and legal dilemmas aside, would you accept the job? Let’s look at what happens when you save a deductible.

The repair estimate is $3,200 with equal parts and labor sales. You give your tech 40 percent of the labor and you make 25 percent on parts. The deductible is $300.

Case No. 1:

Labor sale = $1,600

Labor cost = $640

Profit on labor = $960

Parts sale = $1,600

Parts cost = $1,200

Profit on parts = $400

Total profit = $1,360

Case No. 2:

Labor sale = $1,600

Labor cost = $640

Profit on labor = $960

Parts sale = $1,600

Parts cost = $1,200

Save deductible = $300

Profit on parts = $100

Total profit = $1,060

Now, subtract your operating/overhead expenses (35 percent of the sale is the national average) from your profit. If your overhead is $1,120, case No. 1 yields a net profit of $240 and case No. 2 yields a net loss of $60.

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I know what you’re going to say next. "I took the job to keep my tech busy," or "Business is bad," or whatever other reason you have — but the numbers still show a loss.

I subtracted the $300 deductible off parts because you do great work and want to give your customer the best job possible. How do you think your tech would respond if you told him you’d pay him $340 instead of $640? I think you know the answer.

Here’s another problem with saving deductibles: Your customer wants a perfect repair even though you saved his deductible. What are you going to tell him if he has a problem with the repair? "If you wanted a better repair, you should have paid your deductible"? Get real! You’ll fix any defects and lose more money.

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Know All Your Costs
In his book, Coonradt sums up everything we do in business in one quote: "If you can’t measure it, you can’t manage it." If you do business by that rule, you’ll be on the road to success.

While I was still a shop owner, I measured my techs’ efficiency (flag hours divided by clock hours) and had one tech’s rating drop below the others for two consecutive months. When he told me he was unhappy with his paycheck, I told him he wasn’t working as hard as the other techs. (Before I proceed, I’d like to say one thing: This tech was a gentleman and would work without complaint on anything I gave him.) He became upset and said, " You’ve been giving me all the [crap] cars the last two months."

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He was right.

Since he never spoke up, I’d given him all the older vehicles, which required more repair time, and his efficiency suffered. I solved the problem by giving him his choice of cars during the next month. From that time on, if a tech worked on an older vehicle, he was able to pick his next repair. As a result, the efficiency rating of all of my techs increased.

The bottom line is if you measure your business, you’ll discover your true cost.

A friend of mine, Doug Mewes, who owns Craftsmen’s Auto Body in Norwalk, Calif., once said to me, "I’m in the business to make money, and collision repair is the vehicle I use to achieve that goal. I measure all aspects of my business, and it’s allowed me to reach my goal — and now I can play more golf."

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You can listen to my or Mewes’ advice, attend seminars, hire consultants or read books about operating successful shops, but the knowledge will be useless unless you have the drive and desire to actually follow through and measure all aspects of your business. It takes time and initiative, but once you understand the cost of business, you’ll better manage your shop — and make better financial decisions for your shop.

Writer Toby Chess is director of technical training for Caliber Collision Centers. He’s also the Los Angeles I-CAR chairman, an I-CAR instructor and a certified ASE Master Technician.

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