Part 2 of a 3-part series. (Click HERE for Part 1. Click HERE for Part 3.)
Too many shops post their entire jobber bill to materials – even though much
of it isn’t paint. Shops then sell these items as miscellaneous parts, with the sale going to parts and the cost to paint. To make matters worse, shops are working off adjuster estimates – which can easily cost them hundreds of dollars per RO.
Last month, Johnny kicked the dog. Why? Because his father, Bob, owns a paint jobber store and one of his body shop customers, Hank, told Bob that he “can’t make money on paint!” Hank threatened to take his business elsewhere if Bob couldn’t do something about the problem.
So Bob went home angry and had a fight with his wife, who then yelled at their son Johnny, who then kicked the dog.
Bob decided to work with Hank to find the real problem. To start, Hank showed his profit and loss statement to Bob. Since Bob couldn’t figure out Hank’s gross profit on paint and materials because the statement was poorly formatted, Bob provided Hank with a P&L format from a management seminar his store sponsored. Hank then met with his accountant and produced a reformatted P&L. Because this supported Hank’s contention that he was losing money on paint, at their second meeting, he asked Bob for a discount. Bob pointed out that even if he could provide a discount (and he couldn’t), Hank would still lose money on paint.
Bob then explained that there are only two ways to increase profit: Reduce costs or increase sales. In this case, reducing paint cost by 10% wouldn’t fix Hank’s profit problem. They decided, instead, to try to increase sales to improve profitability.
Bob asked Hank to look into two numbers on his P&L: paint sales and cost.
We now join Hank and Bob at their next meeting.
Meeting No. 3
“Hank, good to see you. How are things going? The shop looks pretty busy!” says Bob.
“Yeah, Bob, that rain last week really helped,” says Hank. “Say, I’ve been trying to get a little more on every sheet to find that 1% we talked about. The adjusters haven’t given me too much trouble about it since I’m only looking for 1%.”
Bob is happy to see Hank happy. Bob always thought it funny that when others are miserable because they wrecked their cars, shop owners are happy. And so are paint jobbers because they sell more paint. Multi-car rear-enders, fog and black ice, bring ’em on!
“Hank, have you taken a look at where those sales numbers and cost numbers come from?” asks Bob.
“I sure have, Bob. It’s really pretty easy. The cost number comes from the check I write you each month. I just code your payment to paint materials. The sales number comes from my sales ledger. It’s just the total of the paint materials from the ROs for the month,” replies Hank, who’s proud he was able to answer the question.
Says Bob: “One of the things I learned from those seminars we’ve sponsored is that many things purchased from the jobber get posted as materials costs when they really aren’t. They may be small tools or miscellaneous parts. Let’s take a look at some of your invoices.”
Hank pulls out a stack of invoices. Bob looks through them and pulls out two. See Chart 1 and Chart 2.
“Hank, you said you just code the check to Bob’s Paint as Paint Materials, right?” asks Bob.
“Yes,” says Hank. “You wanted to know where the paint cost number comes from. That’s it.”
“Let’s look at invoice #19353,” says Bob. “Now the top lines are paint-related items – clear, toners, things like that. But the lower things really aren’t paint materials — unispot nails, car covers, body filler and underseal. I mean, we could argue about them, but they’re used by the body techs and you usually charge out things like car covers and underseal separately on your estimates.”
“Yeah, so what?” asks Hank.
“That means while you’re telling me you can’t make money on paint and want a discount, the fact is that you’re posting stuff to paint materials that isn’t paint materials.
“Now let’s look at invoice #19768. I’m looking at this one, and I don’t see any paint materials here at all. Door skin adhesive isn’t paint. The DA isn’t paint; it’s a small tool. Look at this: You have a $559 spray gun on the invoice, which will be posted to paint materials! That’s not fair!”
“OK, I think I understand,” says Hank. “The way I’ve been keeping my books makes it look like I’m spending more on paint than I really am. So what should I do?”
“I think you need to meet with your accountant. But there is something I can do that I think will help. I’ll have your invoices split between liquids and other materials. That way, you can code your checks more accurately. By the way, did you really buy that gun for the shop?”
“Of course I didn’t,” replies Hank. “I bought it for Sam, the painter. He’s paying me back, $100 per week.”
“How are you accounting for it?” asks Bob.
“He’s paying me cash. I, uh, count it and then put it in my pocket.”
“Hank, that’s not fair to me, is it? I mean, you’re mad at me because you aren’t making money on paint yet you’re charging out a $550 spray gun against your material bill. What you should do is post those small tool expenses to an overhead category. Then, when Sam pays you back, you should credit that account. I’m sure your accountant can help get this straightened out. In that seminar I held, the facilitator said that mis-categorization of cost is a common problem.
“Hank, you said that paint sales number comes from your sales ledger. Where do those numbers come from?”
“Bob, you’re a pain in the @#!” replies Hank. “But I do see your point. I’ll get the cost stuff straightened out, and we’ll figure out how to deal with employee tools.
“The sales numbers come from the estimates. I just take the paint and materials sales numbers from the estimate and post them to the RO. From there, they get posted to the sales ledger. Here’s an estimate of one we took in this morning. You can see how the paint materials are totaled up. That’s where the sales number comes from.” See Chart 3.
“Who wrote it?” asks Bob.
“The adjuster did,” Hank replies. “The customer came in from the insurance drive-in. I sold the job.”
“Did the adjuster miss anything?”
“Sure, they always do,” says Hank. “But I work with them anyway, unless they miss something big, and then I call. It saves me taking the time to write it myself.”
Bob studies the estimate and says: “Hank, I’m looking at this estimate, and I see a couple of things you might want to look at. First, the door skin adhesive kit, car cover, sound pad and corrosion protection are listed as parts. In your accounting system, you post the cost to paint material cost, yet the sale is being posted to parts. Basically, you’re overstating your material costs and overstating your parts sales. That’s a problem. You’re not getting a true picture of your profitability.
“Let’s go back and look at invoice #19768 [Chart 2]. I sold you the door skin adhesive for $39.34. That adjuster paid you $15. You lost $24.34. It’s hard to make money that way.”
Hank sits stunned for a minute and then says: “Bob, I’m starting to wish I never said anything about any of this. Even so, I guess I ought to call the adjuster. I bet I can find a few other things he missed, too. What else should I do?”
“Two things. First, meet with your accountant and get your cost posting straightened out so you have a clear picture of your costs. Second, I think you should go write your own estimate on that Toyota. Go into the P-pages and write down everything that’s not included and figure a time for it.”
Asks Hank: “How do you know so much about this stuff Bob?”
“Because, a while back, Bob’s Paint hosted a seminar.”
“Not another one!” says Hank.
“Yes, another one. In that program, the speaker talked about something called blueprinting instead of estimating. The workbook had an example of an insurance estimate and a blueprint on the same car. I really don’t know much about estimating, other that what I saw in that class. If you want, I’ll bring the workbook by next week. It has some great stuff about pre-repair management, blueprinting, continuous improvement and something called lean production – also known as the Toyota Production System. You should have gone. I think you would have found solutions to a lot of your problems. Next month, we’re hosting another program. That one is all about this very subject – damage analysis.”
“I should have gone,” says Hank. “Sign me up for this next one. In the meantime, I’ll meet with my accountant and go over the estimate to see how much the adjuster missed. I’ll see you next week.”
Bob helped Hank find some very common problems. Many shops simply post their jobber bill to materials – even though much of what they buy from the jobber isn’t paint. Small tools, body shop supplies, car covers and the like are not and should not be charged out as paint materials. Most jobbers, like Bob, can help separate these items on their invoicing system for their customers.
Additionally, many shops sell those items purchased from their jobber as miscellaneous parts. The sale goes to parts, the cost to paint. The shop owner then has an unrealistic picture of his shop profitability. Not only is materials profit understated, parts profit is overstated.
Hank and Bob are beginning to look at how these paint materials are sold by examining the adjuster’s estimate. In the damage analysis seminar I teach, I hold a body product such as door skin adhesive in the air and ask the room for a price. No one is ever correct. The guesses are usually vastly underestimated, even by the jobbers!
Hank’s example of “pocketing” a few hundred dollars is also not uncommon – and is illegal. Anything taken from the business illegally reduces the equity in the business by a multiple of 3 to 5. So that $550 spray gun that ended up in Hank’s pocket cost him $1,650 to $2,750 in business value, Hank’s equity in the business. That’s a high price to pay in order to avoid paying $100 in income taxes.
Meeting No. 4
Let’s listen in as Bob comes back the following week:
“Hey, Bob, how are things out there?”
“Spotty.” (Again?)
“So how’d it go with the accountant Hank?”
“OK, Bob. We’re working on it. There are a lot of things I’ve been charging out as paint materials but are really miscellaneous parts or small tools. It’s not straightened out yet, but we’re going to get it fixed. There are also a lot of things sold as parts that should be credited to paint and materials. We’re working on that, too.
“It looks like we’re going to add new sales and cost categories to the P&L to account for these items. The accountant also pointed out that I have an overhead category we called shop supplies that are really direct costs and should be accounted for properly.”
“That’s great, Hank. So how’d you do with that estimate?” asks Bob.
“Well, I wrote my own like you suggested. Here it is.”
Hank shows Bob his estimate. See Chart 4.
“Wow!” says Bob. “That’s one heck of a difference.”
“Yes, about $750 difference,” says Hank. “I went back and checked my invoices for things like sound pads and corrosion protection materials. I also went through the P-pages and looked for ‘not included’ items. It’s been years since I checked those pages. There’s a lot more detail now, especially in paint. I’m pretty sure I missed some things, too.”
“So, what did you do about it?”
“I went in to see the adjuster, and I took the invoices. We negotiated some things, but I sure got paid a lot more than I started with.”
“You didn’t get it all?” asks Bob.
“Nope, but I got most of it,” replies Hank. “Look at the increase in material sales alone. I just didn’t realize I was giving this stuff away! Look at the clip prices! I’ve been passing over bunches of dollars. Makes me kind of mad. I created a new sales category for my miscellaneous materials so that the accounting will be easier.
“I didn’t realize I was actually paying the adjuster $750 to write my sheets! I’m definitely making some changes. We’re going to audit all estimates for P-page items, and we’re going to try to get paid for more of what we do. I think we can increase our sales substantially without even repairing any more cars.
“I also want to go to that damage analysis class. You know, Bob, I didn’t think those guys could teach me anything, but I was wrong. This business has gotten tougher, and I’m going to have to get smarter so that I can stay in business and make a reasonable profit.”
Says Bob: “I’ll get you the registration form, Hank. So what’s next?”
“I think we’re going to be able to increase sales substantially over the next couple of months through improved damage analysis processes. My accountant and I are working to improve our P&L by adding sales and cost categories so the numbers I see are accurate. Why don’t you give me a couple of months, and then we can sit down and see what the impact is to my bottom line.”
Increasing Profitability
So Hank is becoming an estimation sensation, and it looks like he’s headed down the path to increased profitability. Next month, we’ll see how Hank’s changes impact his P&L.
But first, a word of warning: Hank re-wrote the insurance estimate, sat down with the adjuster and got paid. In the real world, shops have DRPs and insurance relationships that must be dealt with. The fact is: Most of us can improve sales and profitability through improved understanding and more disciplined use of the P-pages. But allow some time to accomplish it so you don’t damage those relationships you’ve spent a lifetime developing.
A friend of mine, Mike Anderson, owner of Wagonworks Collision, uses a phrase I really like: “Educate, not alienate,” when discussing getting paid for what we do.
Writer Hank Nunn is president of H W Nunn & Associates Inc., a collision industry consulting company. Hank is a former shop owner, technician and jobber store owner. Hank is currently the lead facilitator and sales and marketing manager for DuPont’s SMART Seminar shop management training series. Hank may be reached at [email protected]. For more information on the SMART Seminars, call (800) 338-7668, prompt 6, prompt 1.
