Know Your Numbers
Over the last 26 years I’ve been amazed to discover just how many shop owners are lost when it comes to knowing and understanding “the numbers”. In order to build a successful auto repair shop, you are going to need to know two sets of numbers: Your “financial” benchmarks, and your “operational” benchmarks. Without a clear understanding of these benchmarks, it becomes quite challenging for shop owners to pinpoint where they are falling short of their goals, and where improvements need to be made. Far too many times I’ve seen shop owners finally start monitoring these numbers closely, and quickly realize that for years they haven’t been charging enough for parts, have been overpaying their employees, have been operating inefficiently, etc. There’s no doubt about it: a clear understanding of your shop’s financial and operational benchmarks is critical to effective auto shop management.
Since your part cost is one of your largest expenses, it’s something you need to monitor continuously. At Elite, our top clients spend no more than 52% of the dollars they bring in through their part sales, on part cost. This means that if they bring in $40,000 in part sales by the end of the month, the cost of those parts should not exceed $20,800 ($40,000 in part sales X 52% = $20,800 part cost.) If you find you are spending more than 52% of your part sales on part cost, then you need to take a good hard look at how you price your parts, any parts that are being replaced at no charge, your warranty failures, purchasing habits, and the possibility of theft.
When it comes to your direct labor (the cost of your techs), the top shops we work with spend no more than 35% of the dollars they bring in through labor sales, on technician pay. This means that if they bring in $40,000 in labor sales by the end of the month, their technician payroll does not exceed $14,000 ($40,000 in labor sales X 35% = $14,000 labor cost).
You also need to pay close attention to the cost of your service advisors, and here at Elite, we like to see that number at no more than 8% of your total part and labor sales. For example, if your shop generates $80,000 in monthly auto repair sales, your advisors should not be costing you more than $6,400.00 ($80,000 total sales X 8% target = $6,400 advisor cost).
You’ll need to watch your “operational” benchmarks very closely as well. One key indicator is your labor hours per repair order, and our top clients consistently generate at least 2.5 hours of labor sales with their average repair order. If you are not seeing 2.5 hours per repair order at your shop, you need to review your vehicle inspection process, what’s being recommended to your customers, and the declined services.
As a shop owner you also need to pay close attention to your technicians’ “efficiency” rate. This is a powerful key indicator that will show you just how good your techs are at getting the work done in a fast and effective way. It’s easy to discover your efficiency rate by simply dividing the hours you billed for the repair, by the amount of time it took your tech to complete the job. For example, if you bill a customer 2 hours, and your tech gets the job done in 1½ hours, they would be 133% efficient (120 minutes billed/90 minutes to complete the job = 1.33, which is 133% efficient). The top shops are typically operating at an overall efficiency rate of 125+%. There are a number of things that can bring down the efficiency of the technicians in your shop, including a lack of experience, the lack of proper technical training, and one of the biggest culprits, the wrong compensation programs.
And then lastly, after you pay all your expenses, there’s the money that is left over for you. In business we call that profit, and the top shops will typically earn a profit of 15 – 20% of sales. So if your shop is generating $80,000 in monthly sales, in most cases, you should be able to earn $12,000 – $16,000 per month in taxable income. The good news is, if you know your numbers, and if you never put money ahead of people, you should be able to generate these profits in a professional and ethical way.
For additional help building a more successful auto repair business, learn more about the one-on-one guidance and customized action plan offered through the Elite Coaching Program.