- If you don’t measure it, you can’t manage it.
- If you and your people don’t have a target to shoot for, you certainly
won’t hit it. - A smart person learns from his mistakes. A wise one learns from other’s mistakes.
All these expressions are especially true when it comes to your shop’s financials, which is why benchmarking is so important.
Benchmarking is the process of comparing your shop with others to assess how well your business is performing. There are many possible measurements in any business. We joke that the way we used to measure our shop’s success was that if we had any money left in our pocket at the end of the month, things were good.
If only it were actually that simple.
The problem with this is that no measuring is done until the perceived end so there’s no way of knowing where the profit came from, if there was more profit possible or if what you made was acceptable for what you did.
Today we measure our business success using Key Performance Indicators (KPIs), which allow us to know how we’re doing while we’re doing it. The idea of benchmarking is to compare these KPIs to industry averages, industry leaders, your competition or your own goals.
Gross Profit Levels by Department
There are hundreds of possible KPIs in any business. The most common financial KPIs used in our industry are gross profit levels by department. Gross profit dollars are simply the dollars remaining after you pay for your direct costs for those sales. For example, in the case of parts, direct costs would be the dollars you collected for a particular part(s), less the dollars you paid for the part(s). Direct costs often include any shipping/delivery costs that were incurred as well.
Very often, gross profits are reported by percentages rather than dollars. This way, you can compare a business to another business. (Trying to compare gross profit dollars one business receives in parts is directly related to the business’ sales volume, whereas percentages are less so.)
To compute your gross profit percentages, divide your gross profit dollars by the total sales for those items. For example: The part retails for $100, and costs you $68 (you’ve given no discounts or incurred any additional costs).
The gross profit dollars are $100 – $68 = $32 (GP$)
The gross profit percentage is $32
