There is nothing worse than having a busy month only to find out that too many shops cannot pay their monthly statement. A sale is not worth making if it cannot be collected upon, but then you know that. The problem is that you often find out too late.
Consider the following list of points and questions, which creates a quick checklist for your field team to use to determine whether an installer is, or potentially is, heading into trouble. You don’t need personal numbers. The answers to these inquiries will indicate whether the service provider is in, or heading into, trouble. When you know what is coming, you can take steps to ensure you don’t get caught.
1. Is the basic maintenance retail labor rate of the shop below 3.9 times their top mechanical/maintenance technicians’ hourly wage? Ask what the top tech makes per hour and do the math. Does the shop have a tiered labor rate in place? Is this rate less than 5.0 times the diagnostic technician’s hourly wage? If yes, this service provider is not achieving the total shop gross profit percentage required to ensure future capital is available for the necessary growth and operating costs.
2. Does the service provider prepare a monthly financial statement? If he is only reading what his computer is saying they are making from a work order and doesn’t have the accountant prepare the Statement with Balance Sheet using an actual inventory count, they are only estimating their profit. This has been proven wrong 90% of the time. They are not measuring their business properly.
3. Does labor revenue exceed parts revenue? A rate of $1.10 in total labor revenue for each dollar of total parts revenue is the minimum needed today. The ideal number is $1.20 labor to $1.00 in total parts revenue, including dealer parts. If not, this service provider usually argues over parts costs frequently. He is not achieving the net profit potential of the shop.
4. Is the service provider’s accounts receivable exceeding 20% of the average total monthly sales of the shop? If yes, this service provider has cash flow problems and cannot pay all bills in full each month when due. If the service provider doesn’t even know the answer to this question, he is most likely out of control. Do the shop’s receivables contain mostly fleet business? It is extremely difficult to drive a proper profit from fleet accounts. Most shops just keep themselves busy instead of earning net income from this type of business. Is the shop allowing consumer charge accounts? Why would you allow a person to charge today if they can’t get a Visa or MasterCard? Is the shop a member of the local credit bureau? How would this shop do a credit check if it is not a member of the credit bureau? Fleet accounts can cause a shop financial troubles, and consumer credit is not necessary at all in today’s business. Such a shop has not done a true profitability study on its receivables, so the caution flag must be raised very high on this one.
5. Feel the attitude of the shop. Is it positive or negative? Listen carefully to how the owner speaks about the industry and the problems with the industry itself. Are the dealerships killing him? Is it always the jobber or manufacturer’s fault for parts pricing? Do you perceive the staff to be professional (clean-cut, happy, focused, working together as a team)? If not, the marketplace perceives the same thing, and they will not attract the better consumers. They will most likely work only on older cars; therefore this shop runs based on price, and is a potential white-box outlet.
6. Does the shop owner know how to calculate shop efficiency and do it frequently? Inefficiency is the biggest hourly cost in a shop today, and the better shops measure and seek to improve it constantly. Does he know his average labor hours produced per work order? If not, the shop is not measuring productivity; it is running itself and measuring itself based on sales only. If not already in financial trouble, it is heading into it. Management has bought themselves a job.
7. What percentage of the parts purchases go to one main jobber? If it is below 65%, either the supplier has a stocking problem or there is no business relationship between the service provider and jobber. Trust is not in place; therefore the service provider shops on the phone from jobber to jobber, wasting time, creating shop inefficiency, and creating virtually no profitability for the shop. He focuses mainly on parts/hard goods pricing, and is in financial trouble.
8. When was the last time the shop ownership took a full business management course? If it was two or more years ago, they are out of date. Things have changed dramatically since then. Every owner must be in touch with the real math measurement of their business, and understand the standards required today to take their business to the next level.
9. Does the shop owner take a minimum of three weeks of holidays per year, other than basic statutory holidays (Christmas, Easter etc.)? If not, he is most likely not profitable, can’t afford to or is a workaholic, leading to a potentially weak family life which could lead to family breakdown, divorce, and financial ruin.
10. How does the owner feel about his staff? Does he trust them to leave the business frequently to look after business matters, attend necessary management training, or have time off? If not, his shop is heading into or is in trouble. There is no clear future, and the staff feels they have a job, not a career.
The subject of financial viability is always a sensitive one, but it is as critical to the success of your business as it is to that of your customers. By being inquisitive, and poking around with some subtle questions, one can easily nail down the status of the shop. And, if you do it early enough, maybe there will be enough time for you to help that shop turn things around. Then everyone wins.
Robert (Bob) Greenwood is president & C.E.O. of E. K. Williams & Co. (Ontario) Ltd., which has six offices across Ontario specializing in business consulting and training in the independent installer sector of the automotive aftermarket. Bob also works with jobbers to understand the installer side of the industry and address what is required from both parties to set up a relationship that grows future business. E. K. Williams (Ontario) Ltd. is on the Internet at www.ekw.ca. Questions and inquiries can be made in full confidence via fax c/o Jobber News (416) 442-2213 or via e-mail to firstname.lastname@example.org.