Six Strategies to Keep Your Auto Repair Shop Profitable
Until recently, most automotive repair shops were charging far less than they were worth. Too many have grossly undercharged for their services and repairs. However, due to rising expenses, worker shortages, and high inflation, many shop owners finally drew a line in the sand and said “Enough is enough” and raised their labor rates. However, moving forward, many of these same repair shop owners are wondering, “I raised my labor rates, so why do I still have a problem paying my bills?” To be profitable involves more than arbitrarily raising your labor rate. A business must generate profit. Without profit, a shop cannot grow, reinvest in technology, build for the future, and attract and retain superstar employees. In this article, I will outline six strategies to help you keep pace with rising costs and earn the bottom-line profit you and your team deserve.
1. Determine Your Shop’s Labor Rate, Not Someone Else’s
Too many shop owners base their labor rate on what other shops are charging. Calling the competition is not the worst strategy. After all, Coke wants to know what Pepsi is selling a can of soda for, and I’m sure Burger King knows exactly what McDonald’s charges for a Happy Meal. The difference is that these companies know exactly what their costs are for each product and service and create a price strategy to ensure that they meet their profit needs. Calculating your labor rate starts first with understanding the true cost of your technician’s pay compensation. In other words, what does it cost your repair shop per hour in technician wages and benefits for each hour of repairs and services sold? This can be averaged among all technicians, or calculated per technician for the type of work each technician performs. Most traditional auto repair shops shoot for 70% gross profit on their labor. Your specific labor profit needs may be different from your competition, so do the math for your business model. This is a calculation that is best done with an accountant, or even better, a business coach. You must price your labor rate based on your specific labor costs.
2. Sell Value, Not Price
As a business coach, I often get pushback from clients after calculating their labor rate. This is especially true if the shop has been too low for too long. Telling a shop owner that her labor rate, based on her cost of labor, should increase from $105.00 to $195.00, is sometimes hard to accept, and even harder to implement. However, numbers don’t lie and for a business to survive and thrive, a lot of it hinges on charging the correct labor rate. What I tell shop owners is to first believe in themselves as professional businesspeople and focus on the value they and their employees provide to their customers. When the value of products and services increases, price fades as an issue. This will involve raising the bar and ensuring that your customers see the value and appreciate the work you do. If you feel that the labor rate increase is too much all at once, then incrementally increase it over time, a few dollars per month until you achieve the target rate.
3. Understand Your Financial Reports
Every shop owner must understand the reports that can be generated from their business management system. Each system is different, so it would be hard to give you a list of reports. But every management system can create an End of Day Report, or a Business Summary for a particular period. Learn every aspect, every number in that report. From there, learn all other reports that you, your accountant, and your business coach feel have relevant numbers that need to be monitored and tracked. Business owners should also be familiar with three financial statements: The Balance Sheet, the Income Statement (also called the Profit and Loss Statement), and the Statement of Cash Flows. I am not suggesting you learn these reports as an accountant would, or a financial advisor. However, having a basic knowledge of these reports will greatly help you. At the end of each quarter, review these three reports with your accountant and your business coach. Understanding and reviewing your financials is also critical in establishing your budget, which leads to better cashflow management, and an easier time paying your bills.
4. Know Your Breakeven and Determine Your Sales and Profit Goals
Breakeven is the sales number that your auto repair shop must achieve before you begin to make a profit. Breakeven is not a goal, but it is a critical number to know. From your breakeven, you can then establish your sales goals, and break them down even further to establish your parts and labor profit goals. One important fact about tracking total sales; an increase in sales does not always equate to more profit dollars. When sales increase, are there other expenses that have also increased? Such as utilities, insurance, payroll, and other operating expenses. Tracking and maintaining expenses is an ongoing process, and a review of all operating expenses and your breakeven number should be done at least once a quarter. If you are unsure how to calculate your breakeven number, consult with your accountant and your business coach.
5. Work on Production Efficiency, Not Car Count
Too many shop owners mistakenly believe that when they are having a tough time financially, they need more cars. While car count is a number that must be tracked, profit per vehicle is much more important. Do you have all the right systems and processes that allow your shop to maximize workflow production from vehicle write-up to job completion? Do you provide ongoing training to ensure that your technicians are up to date on technology? Do your service advisors have adequate time and support staff to get estimates sold quickly? And lastly, are estimates being created correctly with real-world labor times? Perhaps one of the biggest losses in labor dollars is in the area of drive ability, onboard computer analysis, electrical, and other highly complicated work. Typically, this testing labor is billed at a menu rate that does not bill enough labor time. Take a hard look at these jobs, discuss with your team the actual labor time needed, and adjust to reflect the true labor time required for these hi-tech jobs.
6. Cash Flow is Still King, and Pays the Bills
There are many situations when shops are profitable but still find it hard to pay expenses. Usually, this means that there is a shortage of actual cash. For example, a repair shop can earn a net profit of $50,000 in a given month, with expenses totaling $40,000. You would assume that there would be an excess of $10,000. However, if your account receivables total $20,000, that leaves $30,000 in cash to pay expenses. That would result in a cash shortage of $10,000. In addition, if you spend some of your cash on inventory or buying equipment, that too will eat into your available cash. Cash flow is the total money flowing in and out of your business. Your objective is to always have a positive cash flow, which means you have more cash available than needed to pay all expenses, including any loan payments. To prevent a cash flow shortage, control your spending until you know exactly what cash you need to cover all operating expenses and loan repayments each month. Also, keep your account receivables down to an acceptable level.
Conclusion
Understanding the numbers of the business may not be the most exciting part of what you do as an automotive shop owner, but it is one of the most important. When you tie in all aspects of your business, with a sound understanding of your financials, you will grow a more successful business, with a lot less stress for you and those you employ. One last thing, if you have a hard time grasping financial concepts, you are not alone. Many business owners struggle too. That’s why at Elite we emphasize that our clients understand and report their key performance numbers. Our Elite coaches have expertise in the areas of business finance and have tools that can help you achieve your dreams and goals. Ready to take your shop to the next level? Get in touch today!
About the author – Joe Marconi – With over four decades of industry expertise, Joe is a seasoned professional whose accomplishments include owning and operating one of America’s most successful auto repair companies. A graduate of the Automotive Management Institute, Joe is a recipient of the CARQUEST Excellence Award, served on industry panels, and played a role in developing the ASE Engine Performance Certification test. As a former columnist for Ratchet & Wrench Magazine and co-founder of AutoShopOwner.com, Joe has been a keynote speaker at the Ratchet and Wrench Conference. After selling his automotive company in 2021, Joe now dedicates his time to giving back to the industry as a Top Shop 360 Business Development Coach with Elite Worldwide and serves on the board of directors for the Service Stations Dealers of Great New York. Joe, a Bronx native now residing in Patterson, New York, enjoys family time, community involvement, and pursuits such as tennis, golf, and woodworking.
