Part 1 of a 3-part series. (Click HERE for Part 2. Click HERE for Part 3.)
How was your night, Johnny?” asked Johnny’s third-grade teacher.
“Not too good,” replied Johnny. “I feel really bad because I kicked the dog.”
“Why did you kick the dog?”
“Because Mom yelled at me.”
“You kicked the dog because your Mom yelled at you? Why did your Mom yell at you?”
“Well, I guess Mom yelled at me because Dad came home from work upset and grouchy so he had a fight with my Mom. Then she yelled at me and I kicked the dog. I feel bad because the dog didn’t do anything wrong.”
“So you kicked the dog because your Mom yelled at you because your Dad came home from work grouchy and had a fight with your Mom? Why was your Dad grouchy?”
“Dad owns an automotive paint jobber store. One of his body shop customers told Dad he can’t make money on paint and that Dad would have to cut his prices or the shop will find someone else to buy paint from. Dad can’t afford to lose that account so he was grouchy and fought with Mom and then Mom yelled at me and I kicked the dog.”
I could go on and on with this. Eventually we’d find that Johnny kicked the dog because some insurance company VP looked at a spreadsheet and told some mid-manager that some number on that spreadsheet had to come down and so on and so on – until Johnny kicked the dog.
Kinda funny but all too real.
Ask any jobber or paint rep how many times they’ve heard body shop customers say: “I can’t make money on paint!”
Too many shop owners and managers focus on paint material costs and feel that all of their problems would be solved if they could just get their paint cheaper.
As the owner of a paint store, I heard it from my customers. As a consultant with a major paint company as a primary client, I’ve heard it.
As a shop owner, I’ve said it.
So why do we, as shop owners and managers, focus on paint? For many shops, the jobber bill is the single largest check written in a month. Our parts come from many suppliers. Rent is a biggie, but it’s always the same. Usually, all of our paint comes from one supplier and that supplier needs to be paid, with one BIG check. That tends to get our attention.
So we focus on paint costs. We demand better discounts or benefits from our suppliers. We threaten to take our business elsewhere.
The fact is that many shops have a problem with paint materials profitability. The next
fact is harder for many of us to face: Paint materials profitability issues signal bigger problems – problems that the shop owner and manager are often unaware of.
Usually, paint materials profitability problems indicate problems with paint labor profitability, lack of standard operating procedures, sales shortcomings, quality issues and so on and so on.
In fact, paint materials profitability can be used as a thermometer to check the fiscal temperature of the business.
Pity the Poor Jobber
Many shops simply don’t realize the extent of their dependence on their jobber. We turn to them for help finding employees, to bring us the latest and greatest thing for our shop, to maintain our materials inventory, for psychological help, to train our people and much, much more.
Did you know the collision industry average net profit margin runs between 3 and 5%? Did you know the jobber industry net profit margin is 2.4%?!
Despite our reliance on our jobbers, we scream at them when our costs are out of line. But the fact is, there’s not much left for them to cut. So when faced with the shop owner (their customer) who’s upset because the shop “can’t make money on paint,” the jobber has three choices:
- Do nothing and risk losing the account (dance around it).
- Reduce prices or offer some type of discount (even though there’s not much left).
- Work with the shop to discover the real problems – and then help fix those problems.
Setting the Scene
To illustrate option three, let’s meet two people: Bob, a good paint jobber (Johnny’s dad) who understands the value of consultative selling, and Hank, Bob’s customer who owns an average shop in an average town.
Hank just wrote “the big check” to Bob’s Paint, and Hank is upset that the check was so big. In fact, once Hank cut the Big One to Bob, there was nothing left for Hank. No Roth IRA, no 529 for Hank’s kids, not even enough to pay Hank’s mortgage.
As this story unfolds, we’re a fly on the wall, watching the meetings between Hank and Bob in Hank’s office as they work on Hank’s paint materials issues.
Meeting No. 1
Hank begins the discussion, “Hey Bob, thanks for coming by. How are things out there?”
“Spotty,” replies Bob. (They always say that, don’t they? That’s because there’s a secret jobber school in Nebraska where jobbers send their salespeople to learn how to dodge direct questions.)
“Bob, I might as well get to it,” says Hank. “I’m losing my body shop buns on materials. Man, I paid your bill yesterday and it emptied my account! I value our relationship, Bob, but if you can’t do something about these paint costs, I’m going to have to look at making some changes.”
Bob gives this some thought and replies, “Hank, I understand the problem. The stuff has gotten pretty expensive. I have to ask though, do you have a material cost problem or is the problem a materials profit
“Bob, I CAN’T MAKE MONEY ON PAINT! So I guess it’s a
“Hank, let’s take a look at your Profit and Loss statement. That should tell us if you’re making money on paint and just how bad the problem might be.” (Bob has chosen option three: Work with the shop to find the real problem.)
“Well Bob, I’m a bit uncomfortable sharing that with you,” replies Hank.
“Hank, the P&L is the tool we need to use to analyze profitability. If you want me to help with your materials problem, we need to find out if you really have a problem and how big that problem might be. The P&L is the tool we need to use.”
Hank turns to his computer and prints out last year’s P&L. “We keep our own books on QuickBooks. It really saves me money because I don’t have to pay some accountant for this. Here you go, Bob.”
Hank then shares his P&L with Bob.
The P&L is the basic tool for measuring shop profitability. It’s also known as the Income Statement or the Statement of Income and Expense. In dealerships, the P&L is contained in the operations report.
In Hank’s initial P&L, we see that he has only two income categories but five direct cost categories.
“Well, Hank,” Bob explains, “I’m looking at your P&L here, and I can’t tell if you’re making a profit on materials or not. I don’t see Paint Materials as a sales item, and I don’t see Paint Materials as a cost item. There’s no way to know if you’re making or losing money on paint.
“Bob’s Paint hosted a management seminar a few months ago. In fact, I tried to get you to come to the program! Anyway, the program is about the financial management of the body shop. Here’s a sample P&L from the seminar, Hank.”
Bob continues: “See how there’s a sales category for every cost category? See how there’s Paint Sales and Paint Cost in the sample P&L? If your P&L is properly formatted, we could check to see if you’re making money or losing money on paint. But with your P&L, there’s no way to know.”
“Bob, I remember the seminar,” says Hank. “I was just too busy that day. But I do see what you mean. I guess I should have attended. I understand repairing damaged cars, and I’m good at it. But when you get into this accounting stuff, I’m like a fish out
of water. What do you think I
“Why don’t you take this sample and meet with your accountants, Hank? I’m sure they can help you get your QuickBooks set up to produce P&L that’s structured like this sample. Let me know when you’ve done that and we’ll get together again. Meanwhile, I’ll go take a look at things in the shop to see if there might be some waste going on out there.”
In Hank’s shop, they generate their own financial reports. There’s nothing wrong with that. The issue here, as in many shops, is that the financial reports are poorly formatted. It’s critical to keep the accountant involved because he or she can help maintain discipline in the shop’s accounting system and keep things in a usable format.
Hank’s problem isn’t unique. In fact, it’s common. I’ve reviewed many shop P&Ls, and few are properly formatted.
The P&L should be a management tool. Most accountants are there for taxes, but they can provide much more. You’ve got to ask for their help though.
The first step in evaluating Hank’s Paint Materials Profitability issue is to format the P&L so it can be used as a management tool. It’s much like calibrating a scale or frame gauge. To manage the financial side of the business, you need to have the right tools,
Meeting No. 2
Hank has met with his accountant and re-formatted his P&L to match the sample P&L provided by Bob. Additionally, he has taken last year’s P&L and reduced it to an average monthly P&L with gross profit percentages for each sales category.
During Bob’s second visit, Bob and Hank review the reformatted P&L.
“Hank, this is great!” says Bob. “Now we can see where you’re making money and where you’re not.”
“It’s been an interesting experience, Bob,” replies Hank. “It took a while, but we’ve got this straightened out. And look here, I’m losing 10% on my paint and materials!”
“Now we have something to work with,” says Bob. “And I think we may have a little more work to do. Earlier you said you have a paint profitability problem. In that seminar I told you about, they said that there are basically two ways to increase profit: Increase sales or reduce costs. What do you think we should do?”
Hank thinks for a moment and replies: “It would help me a lot if you could give me a 10% discount on paint.”
This isn’t what Bob wanted to hear.
Now Bob thinks for a moment and replies: “Well Hank, that might be fine, but I honestly can’t afford it. I’d have to reduce service or reduce my workforce. And once word got around town that I’m doing that for you, everyone else will want the same discount. I simply can’t afford to do that. Plus, I don’t think a 10% discount is really going to help you.
“Let’s look at the impact to your P&L of reducing your price on paint by 10%. Since 70% of what you buy from me is actually liquid paint and you’re buying $5,964 from me each month, the 10% discount would apply to only 70% of the $5,969 or $4,178 – and 10% of $4,178 is $417. That’s how much you would increase your net if we could offer a 10% discount on liquids.
“And, you know what? If we reduce your paint costs by $417, you’re still losing money on paint! I don’t think cost is the big issue here. I worked with your guys, and they seem to be doing a decent job of using the product. Maybe we should look at sales.
“Hank, remember, there are two ways to increase profits: Reduce cost or increase sales. Do you think you might be able to increase your sales by 1%, if you tried? Just 1%?”
Hank thinks about it and says: “Yes, if I put my mind to it, I could get another 1% out of this place.”
Bob turns to the calculator: “Hank, if you increased your monthly sales by 1% with no increase in costs, your sales would be $84,246. You’d gross $18,734 and your net would be $2,169. That’s $834 better than you are now and double what you would see if I could give you the 10% discount!”
Hank smiles and says: “Great! Let’s do both!”
Bob laughs and replies: “I’ve told you that I really can’t do the 10%, but I think that working together we can fix this profitability problem of yours.
“I have to get going, but let’s look at this again next week. Why don’t you look into two numbers on your P&L. Next week, let’s sit down and talk about your paint cost number and your paint sales number. We need to see where those numbers come from.”
“Thanks, Bob,” says Hank “I really appreciate your taking the time to work through this with me. I’ll find out where those numbers come from and we can look at it next week. Meanwhile, I need to find that extra 1%.”
So Bob and Hank have started down the road to improving Hank’s profitability through an analysis of Hank’s numbers on the P&L. Next month, we’ll see where those cost and sales numbers come from and find some ideas to improve Hank’s profit picture.
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. He’s 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 SMART Seminars, call (800) 338-7668, prompt 6, prompt 1.