Greenwood: Picking up on some red flags!

By Bob Greenwood, AMAM

Knowing how to step in and help a struggling shop get back into the black is tough enough. Knowing when to do it can be even tougher.

You don’t want to insult a client by suggesting they’re not doing their job. But neither do you want to wait so long that rescue is barely possible.

Asking for numbers is a sensitive proposition. So, here’s a quick checklist that doesn’t require detailed financial information to help you assess whether one of your clients is headed for trouble.

1. Ask for the average cost per billed hour and then do some simple math. The shop’s cost per billed hour should be $145 to $155, and the door rate should not fall below 85% of that. If it does, the shop is not achieving the gross profit percentage it needs to ensure the health of the business. (If they don’t know their average cost per billed hour, that’s a red flag already!)

2. Does the shop prepare a monthly financial statement, broken out into revenue categories? If they’re just looking at revenue numbers or estimating their profits that’s another flag. They’re not measuring their business properly.

3. Does labour revenue exceed parts revenue? A split of $1.25 in labour revenue to $1 in parts revenue is today’s objective. If they’re not hitting that, the shop is likely already in trouble, and probably overly focused on finding cheaper parts.

4. Do accounts receivable exceed 20% of the shop’s average monthly sales? If so, this shop has a cash-flow problem! If they’re not a member of the local credit bureau, doing credit checks, and working with a cautious credit policy, they’re operating as if it is the 90s.

5. Is the shop owner’s attitude positive or negative? Listen carefully to how they talk about the shop, the business climate, and the industry in general. If there’s a lot of blame-shifting going on, they get another red flag.

Listen carefully to 
how a shop talks.
If there’s a lot of
blame-shifting going on,
 that’s a red flag!

6. Does management calculate the shop’s site efficiency according to average labour hours per work order? If not, they’re probably not measuring productivity and are focused on activity (sales). That’s not good.

7. What percentage of their parts come from one main supplier? If it’s below 65%, the shop probably has a stocking problem, or there’s no business relationship with local jobbers. They’re probably wasting a lot of time calling around for the best price.

8. When was the last time the shop owner took a full business management course? If it was two or more years ago, they’re out of date. Things are changing and they have to stay on top of it!

9. Is the shop owner taking holidays? Six weeks per year is a reasonable target. If not, they may not be profitable enough to take time away. Or they’re a workaholic, which can lead to its own consequences.

10. Do they trust their staff to run the business so they can attend industry events and pursue professional development? If not, this shop is headed for trouble. There’s no future where employees aren’t performing like – and treated as – professionals.

Asking some subtle questions can help determine the status of your client shops. Don’t get caught by a business failure that comes “out of the blue.” Know whom you’re selling to.

Bob Greenwood is an Accredited Master Automotive Manager (AMAM) who offers personal business coaching and ongoing management training for aftermarket shops, focusing on building net income. He can be reached at 1-800-267-5497 or greenwood@aaec.ca.