Budget For A Net Profit

Yes, your automotive business needs to make a profit. Based on numbers from JD Power and Associates and EK Williams, the average independent automotive service provider has a net profit of between five to seven per cent a year. As an example, a shop with $650,000 dollars in annual sales will net between $32,500 and $45,500. This takes place with the shop owner spending at least 25 per cent of his/her time in the bays, and usually drawing out a below-average salary for the amount of time they spend in the business.

As with other small business in Canada, you have bought yourselves a job. One of the reasons this does not stress you out more is that as a small business you also benefit from the fact that you can use the business to buy yourself some of the perks of life and expense them to the business. You are taking cash flow from the business that could other wise keep it growing (Please note: this is an observation. I do not condone “creative” accounting practices. I always say that what you do is between you and your accountant).

The industry benchmark for net profit is 20 per cent of sales. The same shop with $650,000 in annual sales should have a net profit of $130,000. One conversation I rarely hear in this industry is, “What rate of return I am getting on my investment?” Take the time to add up all of your assets, tools, equipment, inventory, land and buildings. What is your rate of return on all the money invested in your business? If you have net assets of $500,000, are you getting a 10 per cent return on your investment? That would be $50,000. I am told that with a good financial advisor you can make that by just putting your money in the right place. Why would you work as hard as you do for just a 10 per cent return?

There is a better way

One thing I can say for sure is that people in our industry work very hard and offer a lot of value to the consumer; they are intelligent and diligent. So why are things not better for them? I believe it is because of a lack of knowledge that helps us see things differently and business practices that reflect that lack of knowledge.

Let’s go back to the title of this article, “Budgeting for a Net Profit.” Most budgeting practices I have been a part of in the past focus on sales and expenses. The questions to be asked are, “How much are we going to increase our sales this year?” or, “How much can we reduce our expenses this year?” At best, this is a dart throw because there is usually not much science or math around the decision. Let me propose a different model. Choose your net profit required and work backwards; this is called “bottom up forecasting.”

Let’s use the example of the shop with $650,000 is sales. If we use a labour to parts mix of 40 per cent labour and 60 per cent parts, this shop would have annual labour sales of $260,000 and parts sales of $390,000. This example is based on dozens of shops that I have had the privilege of working with.

As you can see, we are short about $21,000 in net profit based on our forecast, but that will easily be attained if you understand the following. Did you see the growth of average sold hours per work order from 1.1 to 1.5? Can you imagine that only .4 sold hours per work order would give you that gross profit?

Where does this figure of .4 sold hours come from? How about charging for brake inspections and coolant leak diagnosis? Do you charge for all your diagnosis? What about opportunities like fluid flushes and exchanges? Or a great idea one shop had to create a, “Spare tire and storage mechanism service.” Take out the spare tire and check the inflation, service the cable and crank system all for .5 of an hour labour. When was the last time you saw someone stranded at the side of the road because they could not get their spare down and wondered if it was one of your customers? When you perform and charge for many of these valuable services, additional parts and fluids will be sold and that additional profit will make up the missing $21,000 in our exercise.

How do I fit all this extra work in? The average independent automotive shop is only 54 per cent productive — that means management is only keeping technicians working on cars 54 per cent of the time, or only billing for 54 per cent of the work if the technicians are actually working on cars 100 per cent of the time. It is a combination of these factors that keep you from the net profit you deserve. I hope you understand that I am not picking on the technicians. As an industry we ask them to do a lot of things that are not really in their job description, and we give away a lot of their labour.

My challenge to you is to look for those labour leaks and plug them and identify the labour opportunities that will bring you the gross and net profits you deserve. Is this hard work, yes, but it is meaningful work.

SSGM