Being an entrepreneur takes courage and deciding to open your own shop is no easy feat.
The repair shop industry is complex, requires an understanding of mechanics, financial information, parts inventory and labor management.
It’s no wonder that many shops simply fail to thrive.
Now more than ever, with the potential of a looming recession and so much uncertainty, shop owners need to focus on profit first.
Going into the busiest quarter for many tire and repair shops, those particularly in regions where inclement weather guarantees most folks will be swapping to winter treads.
While business is quiet owners can take advantage of this time to plan for success in the coming year.
What I like to focus on is net profit and work our way up the income statement.
First you need to know what your current net profit works out to, simply take that bottom line net income number and divide it by your total sales, that is your net profit (don’t include wages to yourself you’ll want to add those back if they’re on an expense line).
I recommend most owners aim for 10%, if you’re sitting any lower than then you are in need of a tune up and we can help!
First of all I encourage you to look at all the expenses beneath your Cost of Goods Sold (COS) and Gross Profit (GP = Sales – COS) as fixed expenses.
Fixed expenses are simply related to the cost of operating and you don’t try to decrease them; unless of course there’s something really out of line, but for the most part these are fixed.
There is one fixed expense that I want you to consider however and that is your labour expense, I know you might be thinking that is NOT a fixed expense, that’s a labour cost and it sits in my COS.
Do you let go of technicians in July, January and February? Of course not! You simply keep your team at the level it needs to be to handle the volume through your busy times.
It is industry standard and all measures and ratios are based on this fact, so if you have your labour sitting in COS you’ll need to do a little creative arithmetic to rejig the quantitative figures I provide.
Anyway, you can however calculate your labour as a percent of gross profit.
Take your total shop labour (do not include yourself the owner or your bookkeeper and admin staff) and divide this by your gross profit (remember you’ll need to back out labour from that gross profit calculation if its sitting in COS).
If you’re sitting with a labour as a percent of gross profit greater than 40% then you’re not earning enough to justify all the wage costs (unless it’s a slow month then maybe look at a smoothed out average over a period of 3 months or even your year to date).
I’m going to close this entry here because this gives you an assignment to look at just 2 figures on your income statement to see how you’re measuring up.
If you struggle to get this information easily, worry that it is not correct or need help reallocating your mapping in your software then call us and learn how we can help you stay on top of this and take the worry off your plate!
