Auto Service World
Feature   January 1, 2001   by Chuck Udell, president, University of the Aftermarket

UNIVERSITY OF THE AFTERMARKET: Higher, Faster, Stronger

Setting Goals for Your Business


According to industry data, the typical jobber store has a profit margin of less than 3.0%. In today’s highly competitive parts store market with so many players, including retailers, delivering to service dealers, being at an average level of profitability is not enough.

As independent jobbers and WD-owned store groups review current profitability levels, it is also time to ask yourself a key question: Are you completely satisfied with your current profit margins?

Profit margins need to increase for you to be able to defend and grow your business. And, to increase profits, you need solid processes and procedures. Additional dollars are needed for you to invest in your business to make it tougher for competitors to take away customers and market share.

While the road to doing this may not be readily apparent, a time-proven management process has helped businesses increase profitability. This process includes the following steps:

1) Accumulate and interpret information on business performance, market conditions, competitive actions, and general trends.

2) Identify problems and opportunities.

3) Establish priorities for solving problems and realizing opportunities.

4) Set realistic objectives for each including quantity goals and a time frame for achieving them.

5) Develop operating plans for achieving each objective within the time frame including budgets and manpower requirements. This should include plans with people assigned to carry them out.

6) Supervise plans to see that they are carried out according to decisions already made.

7) Be willing to adjust plan if it proves faulty.

8) Check progress at appropriate intervals to determine if mid-course corrections are needed.

9) Feedback results to help in making the next analysis.

Central to this process is the setting of goals, and the primary goal should be profit improvement. This can be achieved in three and only three ways:

1) Increase sales

2) Increase gross profit, or

3) Decrease operating expenses

By setting goals in one or more of these ways, profitability will increase as long as the other factors don’t change to counteract it (e.g. increasing sales but increasing operating expenses equally. Hey, it happens.). So let’s see how it is done properly.

Let us assume that our business, ABC Parts Store, had a net profit for the past year at 3% of sales or $22,500 as shown below:

ABC PARTS STORE INCOME STATEMENT

<

center>(Year Ending 12-31-XX)
Sales $750,000 100.0 %
Cost of Sales 513,750 68.5 %
_________
Gross Profit 236,250 31.5 %
Operating Expenses 213,750 28.5 %
________
Net Profit $22,500 3.0%

Let’s look at what growing our sales by 15% will do to the bottom line. We will only increase our sales. Cost of sales, gross profit, and operating expenses as a percentage of sales will remain the same. This growth would enable our sales to grow by $3,375 as shown below.

Sales $862,500 100.0 %
Cost of Sales 590,813 68.5 %
Gross Profit 271,688 31.5 %
Operating Expenses 245,813 28.5 %
Net Profit $25,875 3.0 %

To increase sales, the store owner or manager must also consider that it will take an investment in at least accounts receivable and inventory. Other investments, such as a new delivery truck or added shelving, might also be necessary. And, to grow our sales by 15%, let’s begin by assuming that it will take a 15% increase in both receivables and inventory.

This impact is shown as follows:

Current Investment Increased
Investment After 15 % Incr. Investment
Accounts Rec. $32,000 $36,800 $4,800
Inventory 42,000 48,300 6,300
———– ——— ——-
Total $74,000 $85,100 $11,100

Where would the jobber/store owner find $11,000? Some ways are:

From profits

From your friendly banker — if not maxed out in loans

By managing receivables and inventory better, so that it does not require a 15% increase in these assets to achieve a 15% growth in sales

And, after looking at these sources there might still not be enough cash available to grow sales by 15%. This is a sure sign that the store owner cannot afford to do this and should settle for a more modest sales growth target.

In most of today’s competitive marketplaces, 15% sales growth is tough to achieve. Let’s see what happens if we take our second route and increase gross profit dollars or gross margin percent of net sales. We can grow gross profit in two ways, by either buying better or selling smarter. We’ll focus on selling smarter because the business owner can control that. Buying better takes both the business owner and the supplier to agree. So, to achieve the same amount of profit that increasing sales by 15% would achieve, we will increase just our sales line by $3,375.

One way to achieve this is by rounding up each line item to the nearest dollar. The increase drops to the bottom line as shown below:

Sales $753,375 100.0 %
Cost of Sales 513,750 68.2 %
———–
Gross Profit 239,625 31.8 %
Operating
Expenses 213,750 28.4 %
———–
Net Profit $25,875 3.4 %

Notice that Cost of Sales does not change because the same amount of parts is being sold. Only the sales dollars increase by selling smarter. And operating expenses remain the same, too. The result is a 0.3% increase in gross margin as a percent of sales. Notice, this increase in gross margin provides for the same net profit dollar impact as a 15% increase in net sales.

You might still be thinking of how competitive your marketplace has become and how it would be tough to achieve the above gross profit increase. So, let’s look at the third route to profit: the expense route. We can achieve the same net profit goals as the increasing sales or increasing gross profit by decreasing operating expenses by $3,375. This impact is shown below:

Sales $750,000 100.0 %
Cost of Sales 513,750 68.5 %
———–
Gross Profit 236,250 31.5 %
Operating Expenses 210,375 28.1%
———–
Net Profit $25,875 3.4 %

It is clear that taking any one of these three routes can yield the same result in the examples shown. In the real world, you would probably want to start with the one you can control first, and then try to work on solutions that will build profit by addressing all three areas.

Profit is what keeps you in business; having a target is what keeps you growing.