Choosing the right machine at the right time for optimum cash flow is vital for profitable operation
Automotive service is far from an easy ride. As difficult as modern automotive diagnostics and repair are, making those repairs profitably is an even greater challenge. The right equipment is a given for a modern shop, but with recession looming, it’s more important than ever to look at the “big picture” before making a major investment.
Will Canada slip into recession? Will it affect the service industry?
According to Hans Smith, sales support and key account administrator for Hennessy Industries Canada, “Eventually it will. There are two schools of thought. Some of the tool companies see an initial decrease, and then pick up as the new car business falls off. The maintenance business sees a surge, but if the recession goes on too long or too deep that fades. The timing varies tremendously by how fast the recession comes on.”
Smith notes that shops don’t automatically shop new equipment ahead of the anticipated surge in repair business that follows each downturn in the business cycle, with the largest operators sticking with long term, planned replacement and upgrades. Will smaller independents open their wallets across the board this season? “Not for the heavy equipment, where they’re more cautious,” says Smith, who adds, “the hand tool community tends to do a little bit better in the beginning. On the equipment side, they tend to buy more on a breakdown basis rather than on a regular turnout. Many Canadian Tire operations, for example, turn equipment every three years whether they need to or not, because in theory it keeps them working efficiently. Many hold off and wait for the machine to break. Of course, as they do more service work (due to an economic slowdown) the equipment breaks down sooner. In the early stages we’ll see a boost, which will drop off later.”
Fish or Fowl?
While the planned changeout strategy is optimal, many shops simply don’t have the cash to rotate serviceable equipment in the chase for the last few percentage points of efficiency. In that case, moving up (or just replacing one-for-one) depends on timing set by the equipment rather than the owner, forcing some important decisions. Even straightforward replacement of “must have” machinery like lifts is a decision with long-range potential. Dennis Moise, Planet Lift vice president sales and marketing, relates: “First you have to define what you’re buying a lift for. If you’re buying it for general service applications or for a specific purpose such as wheel alignment, then the numbers change, and the purpose changes. If it’s for general service, you’re making an investment of four or five thousand dollars for a two-post or small scissors lift. The justification is that you simply can’t work without it, so each lift equals a bay, and each bay equals a certain number or dollars per day. If you get into wheel alignment, lifts are in the $10,000 to $12,000 ranges, but you’re buying that lift in conjunction with another piece of equipment such as a wheel aligner that could cost ten to twenty thousand. It’s an add on to that, or to a diagnostic or emission system.”
There are several ways to conceptualize the return in investment, but the simplest is based on the door rate. “If it’s general service, you cannot do the repairs without the lift so it’s part and parcel of the rate, declares Moise. “For an alignment application, you can justify the purchase of the lift based on work that you didn’t have before. While a customer is there for, say wheel alignment, you hope to keep them for other service.”
Even general-purpose lifts can determine a future product mix, says Moise: “If it’s a general purpose lift, it’s not a profit centre, it’s a necessity. It could also enhance productivity. If you buy a 7,000-pound two post lift, you’re doing primarily small cars. If you buy a 12,000 pounder, you’ve made a decision to get into the truck business. He’s after the fleet business. It’s the only logical reason to go from a $4,000 lift to a $10,000 lift. The labour rate is the same, the volume may be less, but the overall sale will be better. But you have to decide whether you’re fish or fowl.” The same logic also applies to other shop equipment. The number of zeros may be different, but the need to make a commitment to a new service offering in which the new equipment fits, is essential.
Paying for it all
Of course the bottom line is, well, the bottom line, and for big-ticket items, leasing is king. “Leasing”, however, can be a misnomer, because many plans are essentially “lease to own” contracts that leave the unit in the customer’s hands at the last payment. There are definite tax advantages to structuring a purchase this way (check with your accountant), but the most important features are the ability to preserve cash flow and maximize the amount of available capital on the shop’s line of credit.
Ross Quartarone, national credit manager, Snap-on Credit, is a strong advocate of leasing: “We try to discourage a shop owner from paying cash. Buying ties up cash flow, and by leasing he’s minimizing the payments, so he can make money as he’s paying for the equipment. He can budget his expenses more effectively. We encourage the shop owners to see that side of the business. If you lease to purchase, it’s a smaller cash outlay.” The hidden advantage of leasing major equipment is simplicity. With an all-inclusive monthly figure, it’s easy to know what that new machine needs to contribute to the bottom line to pay its way.
A common mistake is to forget maintenance, consumables, power consumption and training when calculating the real cost per month. More sophisticated analyses factor in the “opportunity cost” of that new alignment bench or dyno; opportunity cost is the profitability possible from the same shop floor investment per square foot in an alternate service or capability. I/M posed the opportunity cost dilemma to many shops in Ontario, according to Dennis Moise: “When Ontario launched Drive Clean, a lot of garage owners were making a decision: Go into wheel alignment, which costs a lot of money, or go into emission service? Some said we’ll spend the $50,000 to $60,000 and not do alignment, and vice versa.”
Ultimately, new equipment won’t contribute to the bottom line if it gives a shop capabilities no one knows about. In terms of promotion of new services available with new equipment, Snap-on’s Ross Quartarone declares: “They don’t do enough of it. And they promote it to the wrong people.” Quartarone notes that reliance on subcontract work is a common excuse for inadequate consumer merchandising of new services: “You have to go to market and encourage the end user to come to your shop, not encourage other shops to send you the business. I feel that they should go to the end user and emphasize that they are a one-stop shop.”
There is much more in the new equipment decision than can be covered in any one article, but intelligent shop owners who measure performance in dollars first, won’t go astray.
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