Can you afford to lose $30,000 to $60,000? That's how much is at stake if you don't measure business performance right. Here's some advice.
Producing a complete analytical financial statement may sound as desirable as having root canal, but it can be invaluable for a business when it’s fighting to defeat the rot and decay that can set in through years of accounting neglect.
Many shops need management to pay more attention to monitoring their business on a regular basis.
One of the best ways is through a full analytical financial statement.
Facts speak for themselves. But if you can’t measure it, you can’t manage it. Operating a modern shop today by just looking at the bank balance and sales compared to same month last year is not only archaic and inefficient, it’s a recipe for potential financial disaster.
Our own studies of actual repair business results shows that if a shop producing $400,000 to $450,000 in sales per year does not understand how to measure its performance accurately, it will lose from $30,000 to $60,000 in net income (net profit) per year.
Uncovering or recovering that amount of real money would be enough to attract the attention of anyone with a business. It might even make the prospect of completing a financial statement an attractive proposition.
The real value of a financial statement only becomes evident after it has been applied for a specific length of time.
For instance, a shop suffering from financial duress should produce a statement for at least 24 consecutive months.
This allows management to see the trends and see where profit is generated, or inotherwords, the major money-making sources for the operation.
All shops should produce at least a quarterly operating statement to ensure the operation is fully and accurately measured so that issues can be discussed intelligently.
Measuring a business once a year is inadequate because it’s too late to embrace opportunities. They have already past.
Basic elements of an Analytical Financial Statement are:
Total revenue in predetermined categories for the month (or quarter) and year-to-date
Gross Profit return measurement for each revenue category for the month (or quarter) and year-to-date
Expense categories for the month (quarter) and year-to-date
Net profit for the month (quarter) and year-to-date
Balance sheet compared to the previous accounting period (month or quarter).
The basic revenue categories that are measured today include, oil, tires, batteries, aftermarket parts, dealer parts, maintenance/mechanical labour and diagnostic labour.
Some shops will break this down even further such as customizing work into menu pricing categories such as alignments, exhaust etc.
Before one gets too complicated and confused, it is recommended to start with the seven initial categories mentioned.
By understanding the source of revenue for the shop, it becomes easier to measure performance against industry statistics.
It also allows you to determine what type of customer/client base you are serving.
For example, when measuring parts sales, if the shop sells 90% aftermarket parts and 10% dealer parts, traditionally it means the shop is repairing and working on older vehicles.
Conversely, if the shop is averaging 75% aftermarket parts, and 25% dealer parts, then clearly, the shop is working on more newer vehicles.
Each scenario has a different impact on the type of equipment and staff skills that are necessary to meet the demands of customers and achieve client satisfaction.
As the sales mix changes over the course of two to three years, either way, one can judge quite accurately the future demands of the shop in terms of staff training and equipment acquisitions.
Gross Profit Measurement
Gross profit return is critical to net profit performance. But once again, one must understand where the profit comes from.
The following guidelines work well to ensure one is on the way to a healthy bottom line.
The gross profit return for oil should be a minimum of 50%, however 60% to 65% is achievable through good management.
Here are other important gross profit guidelines:
Tires — 10 to 25% gross profit
Batteries — 35% gross profit
Aftermarket parts — as high as 50%
Dealer — Range from 18%to 25%
Maintenance/mechanical labour should average 90% gross profit and higher when technician wages are eliminated from the cost of labour and only sublet costs inserted into the labour cost
Diagnostic labour would show a 100% return.
Ensure that your gross profit percentage for oil, tires, batteries and parts is calculated using the correct accounting formula for cost of goods sold; which means you must insert the correct inventory numbers.
Cost of goods sold is calculated by taking the opening inventory plus purchases and subtracting the closing inventory. Dollar sales less dollar cost of goods sold equals dollar gross profit.
Dollar gross profit divided by dollar sales equal the gross profit percentage achieved.
When a shop only uses the purchase made, they are wrong in their calculations. Don’t be mislead or mislead yourself, use the correct accounting formulas. Shops should target to produce $1.20 in total labour revenue (maintenance and diagnostic combined) to $1.00 in total parts sales (aftermarket and dealer parts combined).
A shop should also work toward achieving a minimum of 10% (but preferably 20%) of its total labour revenue as diagnostic labour which is charged out at a higher tier rate.
When these guidelines are achieved and measured in this fashion, the shop will average 65% to 70% gross profit return from total sales in the service bays.
It is important to take the time to customize the operating expenses of the shop to your needs and requirements.
What expenses should be measured and are important to you?
One way of setting up the entire wage expense is to break it out into technician wages, service advisor wages, administration wages, management wages and shop burden (benefits) such as CPP, EI, Workers compensation, group insurance etc.
One criteria for measurement is to produce $1.20 in total labour revenue to $1.00 in expense on all wages (including management’s) and benefits.
The balance of the shop expenses should be monitored and managed always with goal of answering the real question of whether the expenses are controllable, non-controllable or common sense expenses in relation to what the shop is trying to achieve in customer/client service and satisfaction.
I believe you will find, after a detailed analysis, that many of the operating expenses fall into the common sense category, which can be surprising. Ultimately, costs should always be viewed in terms of what the shop is trying to achieve in customer/client satisfaction.
Net profit seems to be an elusive figure to calculate for many shops. To get a true measure of net profit, management wage, or draw, has to be factored in. The objective should be to net 10% of the shops’ sales, before taxes, but after management wages or drawings.
When this is achieved, the capital is usually in decent supply to keep the shop well equipped not only with top equipment but also with top quality staff.
A complete and full balance sheet compared to the previous accounting period allows the management to see where the profit dollars were spent throughout the shop.
Some profit may be tied up in accounts receivable, inventory or equipment. Maybe some net profit was spent to reduce debt load or accounts payable.
Wherever it went, it is important to see how management is handling the profits made in the shop. It can only be accomplished with a full comparative balance sheet.
Accurate and complete information about the business means better management decisions and actions toward the business. Management decisions are always made with more confidence and conviction when the financial information is accurate.
Take the time to measure your business completely and accurately. It may shock you where net profit dollars can be found in your current business and with your current customer/client base.
Establish a more structured approach to managing your business.
e biggest obstacle you face in achieving accurate financial figures for your business is often in changing the way you do things. Commit yourself to changing your management system tradition if your business performance results leave something to be desired. SSGM
|SAMPLE OPERATING STATEMENT|
|ASSETS||THIS MONTH||LAST MONTH||VARIANCE|
|CORP. TAX INSTALL||2,620.69||2,406.69||214.00|
|NET WORTH CHANGE||5,523.69||17,195.59|
|Fiscal Year-end: FEBRUARY|
|CASH SHORT (OVER)||137.40||0.3||0.2||510.73||0.2||0.1|
|MAINT. & REPAIR||49.59||0.1||0.1||6,408.87||1.3||0.8|
|DISC. & REFUNDS||75.00||0.2||0.1||158.00||0.1||0.1|
|CRED. CARD DISC.||2,679.25||4.5||2.6||20,041.99||4.1||2.4|
|LAUNDRY & UNIF.||206.10||0.4||0.2||2,626.16||0.6||0.4|
|FREIGHT & DEL.||0.00||0.0||0.0||0.00||0.0||0.0|
|LICENSES & TAXES||1,854.85||3.1||1.8||16,686.32||3.4||2.0|
|ACCT. & LEGAL||530.47||0.9||0.5||5,817.74||1.2||0.7|
|NET PROFIT *****||5,523.69||9.3||5.3||17,195.59||3.5||2.1|
|CORP. TAX PAID||0.00||0.00|
|ADJ.TO NET WORTH||5,523.69||17,195.59|
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