Return On Investment Measures Management’s Competency

Jobbers across Canada must acknowledge that there is more to running a parts store than making a sale, then trying to collect for it. This is a complicated business today, requiring an understanding of many details.

The industry is very well known for its infatuation with sales volume, inventory levels and achieving the best margins. An area that is rarely addressed by the industry, however, is the ultimate measurement of return on investment for the effort. Many jobbers I have met do not clearly understand its importance or how it is calculated.

ROI, as it is termed, is the generator of a business. It generates additional profits for dividends or other profit-taking methods. It generates capital or additional credit rating for expansion or acquisition. It generates a scorecard to measure the financial strength of a business and management’s ability to create the most profit from the value of the investment.

In order for shareholders or investors to judge the efficiency of the jobber store operation and the soundness of their investment, they must convert the dollar numbers from their year-end formal financial statement into measurable percentages and ratios. After the dollars have been converted into these measurements, the shareholders can compare the operation on a year-to-year basis, with industry averages and with alternative investment choices.

Complete the following nine calculations from your own year-end financial statement as prepared by your accountant and measure your own business’ return on investment.

Gross Margin Percentage

This is the relationship of the gross profit dollars to the total sales dollars expressed as a percentage. This is a measurement of the merchandising effectiveness of the store’s lines.

Gross Profit Dollars/Total Sales Dollars = Gross Margin Percent

Expense Percentage

The relationship of the total expense dollars to the total sales dollars expressed as a percentage. This is a measurement of the operating effectiveness of the business.

Expense Dollars/Total Sales Dollars = Expense Percent

Net Profit Margin Percentage

This is the relationship of the net after-tax profit dollars to the total sales dollars expressed as a percentage. This is the measurement of the total merchandising and managing efficiency of the overall store.

After-Tax Net Profit Dollars/Total Sales Dollars = Net Profit Margin Percent

Inventory Turnover

The ratio of inventory dollars to the cost of goods sold. This is a measurement of the biggest asset account: inventory. The resulting ratio is the number of times a store could sell its total inventory during a year.

Cost of Goods Sold/Inventory = Inventory Turnover Ratio

Accounts Receivable Collection Days

This is the measurement of the length of time it takes to collect the average credit sale. If you have cash and credit card sales, take them out of the equation.

Total Credit Sales/Days in Reporting Period = Average Credit Sales Per Day

Total Accounts Receivable/Credit Sales Per Day = Accounts Receivable Collection Time

Asset Turnover

This is the relationship of the total assets to the total sales dollars expressed as a percentage. This measures the efficient use of all of the assets available.

Total Sales Dollars/Total Assets = Asset Turnover Ratio

Return on Assets

This percentage is the relationship of the after-tax net profit to the total assets. It is another measurement of the effective use of available assets.

Net Profit Margin % x Asset Turnover Ratio = Return on Asset Percent

Financial Leverage

Shareholders’ investment money (net worth) plus creditors’ money (total debt) is used to fund and pay for all the assets that are being used to produce sales and profit. Financial leverage is the relationship of net worth to total assets. It is a measurement of the ability to use other people’s money to produce sales and profit.

Total Assets/Net Worth = Financial Leverage

Return On Investment Percentage

This is the ultimate measurement of business and investment efficiency.

Net Profit Margin % x Asset Turnover x Financial Leverage = Return on Investment

Well, how did you do?

The magic number you want to embrace for an ROI in the jobber business is a minimum of 20%. When you are consistently at or above this number, it proves that management is in control, and under control.

Too many jobbers have a tendency to brag about their total revenue and inventory values. This has never impressed me. The ultimate test of management’s competency is whether you can take that revenue and inventory value and turn it into a stellar ROI, after management has been paid a very professional wage of at least $100,000 to $150,000 per year. Now we are talking business.

In these trying times within the aftermarket, perhaps it would be worthwhile to study closely how the numbers line up within your business. Then set a focused game plan to turn those numbers into a result that attracts a future purchaser or creates the atmosphere for a future generation to get excited about your business.

The math does not lie: focusing on return on investment makes a big difference, and its pursuit can make the difference between creating a job and enjoying a career.

Robert (Bob) Greenwood is President and CEO of E. K. Williams & Co. (Ontario) Ltd. and Automotive Aftermarket E-Learning Centre Ltd. Bob has 28 years of industry-specific business management experience. He has developed shop business management courses for independent service providers recognized as being the most comprehensive courses of their kind available in Canada. Bob is the first Canadian Business Management Consultant and Trainer to be recognized for his industry contributions when he received the prestigious Northwood University Automotive Aftermarket Management Education Award in November 2003. E. K. Williams & Co. (Ontario) Ltd. offices specialize in the independent sector of the automotive aftermarket industry preparing analytical operating statements for management purposes, personal and corporate tax returns and business management consultation. Visit them at www.ekw.ca and sign up for their free monthly management e-newsletter. Automotive Aftermarket E-Learning Centre Ltd. is a leading edge company devoted to developing comprehensive shop management skills through the E-Learning environment. Visit AAEC at www.aaec.ca . Bob can be reached at (613) 836-5130, 1-800-267-5497, FAX (613) 836-4637 and by E-Mail: greenwood@ekw.ca or greenwood@aaec.ca.