Key Numbers for Shop Survival – Round 2

By Tom Ham. A little while back I wrote an article concerning key numbers for auto service shops. The numbers covered at that time included total spending, total gross profit, potential work found per car, number of oil changes, number of new customers and tech vs. non-tech ratio. I was recently asked to cover some additional key numbers for auto shop survival, so here we go!

Total Payroll

A profit killer in many shops is excess payroll which occurs for a number of reasons. The amount of payroll required in relation to total sales has gradually decreased over several decades as expenses due to technology and ever increasing government regulations have skyrocketed. Many shops which have been around for a long time are still basing their payroll on old numbers which are too high. Other shops simply have too many people for the amount of sales that they generate. For shops in areas where sales have dropped over the last few years, this is a very common problem. There is the hope that better sales will soon return, but until that occurs the money drain is too great. Other shops are just plain inefficient due to old bad habits, not taking full advantage of new technology and the tendency for many of us in this industry to be less than well organized. While these all come into play to varying degrees at different shops, the biggest cause of excess payroll is pay systems which are insufficiently dependent on incentive. The choice is not either hourly (salary for some) or pure flat rate. There are many options in between. Some type of significant incentive pay system, for everyone…not just techs, is the norm in most profitable shops today. A goal to shoot at for total payroll, meaning all payroll except the owner, is a maximum of 23-26% of total sales. If you are much beyond this, you will generally have a rough time achieving solid profits.

Total Expenses

The range of numbers which I have seen over the years for expenses is staggering. Some shop owners seem to be born with an amazing ability to not overspend while others spend like Congress. Keeping this number in line can indeed be a very boring task, however it becomes less boring when you find that you can often save $1,000 or more with an hour or two of effort. To earn that much in the shop, you have to do about $5,000 (or more) in total sales. An expense hound can significantly “out earn” even the best tech. Every shop wastes money in this area, from a few thousand a year to literally hundreds of thousands. Create a plan to thoroughly track and monitor every line on your expense statement. Here is one quick tip…if your expense statement has less than 100 lines on it (many shops have 30 or so), it will be extremely difficult to accurately watch your expenses. One expense hound I know has 350 lines on her expense statement so she can track literally every dime. A good goal for total expenses is no more than 29-33% of total sales (expenses are defined here as all spending of all types, except the cost of parts and the cost of payroll). The top shops in the profit race tend to do very well here, often achieving numbers much lower than 29%.

Gross Profits

In the previous article, we discussed total gross profit (GP) with the goal being 57-63%. Of course, the recipe includes several ingredients. For the typical shop, here are some good goals: Parts GP 57-63%. Labor GP 67-74%. Tire GP 28-32%. Many shops have a hard time getting good tire GP, although it is not terribly difficult once they make the decision to do so. In recent years, the numbers for both parts GP and labor GP have been gradually increasing in the more successful shops with some consistently hitting parts GP’s in the 55-60% range and labor GP’s in the 75-80% neighborhood.

Cars Per Tech Per Day

Although low car counts have been a common complaint over the last several years, too many cars for the number of techs is still a problem for a lot of shops. While the fear of not having enough cars for the techs to service is often large, the fear of having too many is frequently nonexistent even though it can do severe damage to profitability. To get the most legitimate work out of the cars coming through your bays, three things need to occur. The tech must look over every car thoroughly; no exceptions. The service advisor (SA) must estimate everything that the tech finds; no exceptions. Finally, the SA must inform the customer of everything that was found and estimated; again, no exceptions. When there are too many cars, there is simply insufficient time to do all three things properly. So, the average repair order (RO) tanks as the shop puts through a lot of cars while achieving a weak percentage of potential sales. For the typical shop, 3 to 3.5 cars per tech per day is about the right amount. Less than that can cause techs to be standing around, but much more than that will usually leave large amounts of unsold work on the table; work that some other shop may just do.

Sold Hours vs. Available Hours

This is the comparison of how many hours are sold (or billed) to how many hours that the techs are physically at the shop “punched in” to be available to service cars. When the pay system involves little or no incentive pay, this number is often weak. On the other hand, with a solid incentive pay system in place, the number not only tends to be better, but it also becomes less critical since techs are being compensated primarily for what they actually get done. Inefficient shop operations also makes a good number difficult to hit. One other cause of a weak number here is too few support people for the number of techs. Remember, the main reason that techs produce low numbers is due to the management; not the techs. Better shops generally bill about 80-85% of available tech hours. A solid goal is 95-105%. Basically, if a tech is at the shop 40 hours, you should be able to bill 40 hours if you are running things reasonably well.