Improving Gross Profit Isn't a One-Person Job
It’s finally football season, and I can tell you that’s a happy time at my house! My family and I are diehard Carolina Panthers fans. We’re so devoted, we openly profess our praise for Cam Newton! All those things being said, the only way to enjoy your team is to see it winning on the scoreboard. Can you imagine what it would be like if the score wasn’t in the corner of the TV, and nobody knew who won until the final whistle… or even worse, three months after the game ended? That would be painful!Far too often, this is how many of us run our stores. Some of us don’t see our P&L for months after the month has closed. Personally, I’m cranky if I don’t have a P&L within one week of month-end. But truth be told, the month is over at that point regardless of how we did. I want to see the score while there is still time in the game to change the strategy or focus.
Being a Carolina Panthers fan living in Atlanta (our arch rival) has its challenges. A few years ago, Super Bowl 51 was between New England and Atlanta. If you all recall, Atlanta was winning 28-3 at half-time, but still lost, 34-28. Imagine if New England and Atlanta had no idea who was winning at half-time. Would the Patriots and Coach Bill Belichick have changed their strategy or looked at different ways to inspire their players if they had no idea of the score? I don’t believe they would have. And they probably would have lost.
Our scores are a little more complicated than a simple black-and-white final score. But if we pay attention to a couple high-level key performance indicators (KPIs), we can improve our results at a minimum, and more than likely, come away with a win.
The expense that we have the most control over and has the largest impact is payroll. Keeping payroll in line is critical to exceeding double-digit profit percentages. In our industry, I have seen some companies include technician payroll in cost of goods sold (COGS). I advise against this, but that’s a column all by itself. I prefer to measure all payroll (sales staff and technicians) the way other retailers measure it, as an expense, measured as a percentage of gross profit (GP); 45% should be your goal. I promise you it isn’t easy, but winning rarely is. Just to help with the calculation, here is the formula:
Total payroll (including employer-matched withholding) divided by your total GP.
For example, if you had a total payroll of $53,252 and gross profit of $112,354, the percentage is 47.39% ($53,252 divided by $112,354 = .4739).
OK, we have a percentage now, but how do we really improve payroll? This question has many correct answers. Although cutting payroll or reducing head count may be necessary, I prefer focusing my efforts on improving GP dollars.
Getting your team involved in the score is a best practice. Let your team know what they must achieve to get a win. You don’t have to provide them with the total payroll dollars, but tell them how many GP dollars they must achieve to keep payroll in line. Most stores don’t have a GP dollar goal per month let alone per week or day, so they never know if they are winning. They must rely on guessing based on total sales, and that rarely turns out as good as we think!
To get payroll right, we must get our GP dollars healthy. This will improve with sales. However, are we selling the right mix of business? For every dollar spent in the aftermarket for tires, there is approximately an equal dollar spent for parts and another equal dollar for labor. If you see a large variance in your mix of tires/parts/labor, generally the first place to look is your inspection/workflow process. If you don’t inspect it, you don’t see it and therefore you can’t recommend it.
I do not encourage invasive inspections for all cars, but I do encourage a discussion with your team on how you inform customers and generate more inspection opportunities.
Another way to improve your GP dollars is making sure you are focusing on high GP items, like alignments, tire protection warranties, manufacturers’ scheduled maintenance, filters, bulbs and wipers.
If your point-of-sale (POS) is set up correctly, you can run reports rather easily to get your sales numbers, and then you can compare that to your car count. I will say this: People rarely improve what they don’t measure. Therefore, if you aren’t keeping score and sharing the results, you may end up spinning your wheels with little to show for it.
Another key factor is your GP percentages on parts and tires. If you aren’t hitting your GP dollars to keep payroll in line with these other methods, you probably need to raise your prices. I know a lot of people who are considerably more expensive than everyone in their town yet have more cars than they can handle. Do we all remember the law of supply and demand? If demand is high and we have limited supplies of time to do the work, we should raise our prices.
If you haven’t shopped your competitors lately, I highly suggest you do. Many of the big players now have labor rates over $150 per hour, even in some suburban markets. I don’t know of any big players under $100, even in the most rural areas.
Although there are many more items you could track, try to avoid analysis paralysis. Keeping payroll in line is critical to exceeding double-digit profit percentages, so take action! Even if you make a move too far in one direction, you can always pull back if you see something slide.