Greenwood On Management: “What is your gross profit per hour now, and what are you really missing?

January and February are a couple of months where many shops have some time on their hands. Consider putting this time to constructive use. Consider doing a little exploratory work on your business, and discover what is really going on.

A very important number to understand within your business is your gross profit per hour. Many shops know their average sales per work order/invoice, and seem determined to increase their work-order “volume” as much as possible. They are failing to slow down to understand the real number where expenses paid out are concerned, and from where net profit is generated. That key number is your gross profit per hour.

Complete the following exercises and see what you discover about your shop. I believe you will be amazed.

1. Take the total labour revenue sold for the past year and divide it by your labour rate. If you have two labour rates take the maintenance labour sold and divide it by the maintenance rate, and take the diagnostic labour sold and divide it by the diagnostic rate. Add the two answers together. This total number gives you the total number of labour hours billed for the year.

For example: Your shop’s current labour rate is $60 Total labour revenue for the year was $350,292 $350,292 divided by $60 = 5,838 hours billed

2. Take the total gross profit dollars from your financial statement and divide it by the total labour hours billed. Your total gross profit dollars is the dollars earned from all sales of oil, tires, batteries, aftermarket parts, dealer parts and labour combined. This answer, in effect, becomes your gross profit per hour.

For example: Your total shop’s gross profit made last year was $469,450 $469,450 divided by 5,838 = $80.41 gross profit made per hour

3. Take your total expenses for the year, including management wages and divide that number by the total labour hours billed. This answer becomes your average expense per hour. Gross profit per hour minus your expense per hour now becomes your net profit per hour before tax.

For example: Your shops total expenses for the year, including management wages were $452,450 $452,450 divided by 5,838 hours billed = $77.50 cost per hour $80.40 gross profit per hour minus $77.50 per hour = $2.90 net profit before corporate income tax.

Now don’t get depressed at this point, it is time to become informed about your business.

What would be the results to your gross profit per hour and bottom line per hour, if you raised your labour rate $5 per hour and produced the same other revenue at its current gross profit and the same hours billed while holding expenses to the same level? In our example, that would mean going from $60 to $65 per hour.

The results would be as follows: 5,838 hours billed times $5 equals an additional $29,190 gross profit earned. This translates into a total gross profit per hour of $85.41 ($80.41 + $5.00) That number additional $5 would drop right to your bottom line. Your net profit per hour now goes to $7.90 per hour ($2.90 + $5.00).

If you feel you would lose “customers” over a $5 increase in your labour rate, I must say emphatically, you do not have any kind of relationship with those people, and you are far from focused on your business. You are more interested in creating activity, not net profit.

So much for examples. Now let’s look at a typical shop in Ontario.

A typical shop in Ontario today, who is paying a licensed technician $20 per hour should have a minimum door rate of $78. We find the average door rate in Ontario is approximately $63. The average shop is billing out 1.3 labour hours per work-order/invoice, and a typical 4-hoist shop is producing in the area of 3600 work-orders/invoices per year.

If this shop slowed their processes down, and if needed, fired some customers by reducing the number of work-orders/invoices written, say by 20% (wow- I don’t believe you would lose that many), and got focused on their business by building client relationships, thus bringing the billed hours per work-order from 1.3 to 2.0 hours per work-order/invoice by counseling a client based on his/her needs, raised their rates to where they should be ($78 per hour), and delivered true value, when charging these rates, the results would be as follows:

OLDNEW

Work-orders/invoices written36002880

Hours billed per work-order/invoice1.32.0

Labour rate$63$78

Total Labour revenue$294,840$449,280

THE MATH DOESN’T LIE…………THAT IS $154,440 IN ADDITIONAL GROSS PROFIT MADE JUST FROM LABOUR FOR THE YEAR WHICH ALSO BECOMES AN ADDITIONAL $26.81 GROSS PROFIT PER HOUR !! (2880 work-orders X 2.0 hours each = 5760 hours billed……..$154,440 divided by 5760 hours = $26.81)

If you are a shop who is interested in creating sales and maintaining a “busy” shop rather than focusing on gross profit and net profit, I think you should consider re-doing your math. Are you working smart, or are you working hard? The fact is that too many shops work hard because some one told them to build work-order volume and more sales from more customers. More, more, more? I believe you have enough already, but you must rediscover what you really do have and get very focused on them.

It has been proven time and time again, slowing down and concentrating on building the relationships with your chosen clients is less stressful and more profitable than building volume with customers.

Our industry changes, and consequently we must change the way we look at our business. I know for some this is stressful, but change is not an option.

Success in your business is a continuing thing. It is growth and development. It is achieving one thing and using it as a stepping stone to another achievement. Slow down, and discover your business.

Robert (Bob) Greenwood is President and CEO of E. K. Williams & Co. (Ontario) Ltd. and Automotive Aftermarket E-Learning Centre Ltd. Bob has over 27 years of Business Management experience within the automotive industry, counseling individual shops in Ontario.

E. K. Williams & Co. (Ontario) Ltd. offices specialize in the independent sector of the automotive industry, preparing analytical operating statements for Management purposes, personal and corporate tax return completion, Business Management consultation and Business Management and Employee Development Courses. Visit E. K. Williams & Co. on the Internet at www.ekw.ca and sign up for their FREE monthly management letter sent to you by E-mail.

Automotive Aftermarket E-Learning Centre Ltd. is a company devoted to developing Automotive Shop Business Management skills through the E-Learning environment over the inter-net. Students learn at their own speed, and at a time, and place, that best suits their needs; available 7 days a week 24 hours a day. Visit Automotive Aftermarket E-Learning Centre Ltd. on the Internet at www.aaec.ca

Bob can be reached at (613) 836-5130, 1-800-267-5497, FAX (613) 836-4637 or by E-mail; greenwood@ekw.ca or greenwood@aaec.ca