I’ve searched the world over and have come to the conclusion that the automotive and heavy duty truck business is truly the most profitable and at the same time the most unprofitable business in the world. Yet when all of the smart people are gathered in one room they all come out with the same remarks.

You must get 55% margin on parts! If you don’t achieve a 30% margin you will surely fail.

Shop owners readily pick up the mantra and shout from the corners of seminars around the country, “I won’t sell for list; I need to get a respectable return on my money. We multiply everything we buy by a factor of 2.”

I like those words, “a factor of 2”; you know right away the man stays awake during the management seminars. When I ran my family business, we called it a “foreign car shop”, not to be confused with those American repair shop/gas stations, and we were able to charge more, thankfully because our accountants and banker tried to teach us all about money. You see, I believed my accountant must have been the most successful accountant in the automotive business. He taught me a little secret, a secret that I assumed he only told me. That is until I went to my first automotive business management seminar and I realized the he must have told everyone this very little secret. “You have to make 60% on labor and 40% on parts.”

I was confused and elated that I finally heard this secret out in the open. Now I could ask questions. But before I did I heard everyone agreeing that this was the formula for success. A little voice inside my head kept asking a little tiny question. It was a very small question but to this day I still hear the echo in my head.

"If everyone knows the secret of the automotive business, why is everyone going out of business?"

The auto business is notorious for taking young men and women, families even and spitting them out like yesterdays garbage.

Something was wrong and I got a glance of it during the mid eighties. I went to a body shop management seminar and was taught all about ‘job costing’. It was a term I remembered hearing when I was growing up only then it referred to the manufacturing of cloth. That’s a story for another day.

Back to job costing, body shops have been doing it for years mainly because they had a very sophisticated customer (insurance companies) who refused to pay unjustified prices but was more than willing to pay for provable invoices. My only problem back in 1985 was that it was too time consuming to job cost every single minor service, major service and blown head gasket. That's why ServiceShop and SSM were developed.

I always thought that if I could only computerize my business I could then deal with job costing.

Have you ever noticed that the more things change the more they stay the same? Case in point, who will try to say that the business computer hasn’t caused a huge ripple in the automotive business, And yet the huge majority of business software being used by shops around the country continue to track profitability by labor, by parts, by ticket all in percentages. Back to the Stone Age, only now with a really neat computer that you can order parts with.

Let me give you the picture again. Some of you are old enough to remember the banker who stated that we must get a fair margin on parts sales, that was the same guy who came to work at 9 o’clock in the morning and closed the bank at 3pm. leaving us with the term “Bankers Hours”.

If percentages and margins are not acceptable numbers in running a modern repair shop, what is? ServiceShop along with QuickBooks will track all the numbers you need. We will get to that in a moment, but first let’s look at this through the numbers.

One of my favorite stories is just that, a story but it makes my point.

Imagine on a beautiful Monday morning two cars drive into the yard with similar complaints but far different fixes. They both are barely chugging along, engine lights are on and of course they both shut off their engines right in the middle of the driveway. You write up their tickets and get permission to diagnose and repair. Both cars get pushed into the shop at the same time, precisely 8 am. The first car gets diagnosed to be a clogged fuel filter and by 9 am the car is ready for delivery. The second car also gets repaired within the first hour and this car needs a battery charge, a new alternator and a road test.

Now the trouble begins for the service writer. His boss (dear old Dad) just spent the weekend at a business seminar learning… you guessed it, how to make money repairing cars. The new numbers for the day are 65% profit on labor and 50% profit on parts. As the service writer starts to close out the two tickets he becomes very excited about the first job.

$67.83 or 66%GP Labor

$ 6.50 or 84%GP Parts

$78.79 or 67%GP Total

Now this is good he thinks to himself, nobody is going to be upset with him. Not the customer, tough repair found quickly, priced so well the boss will love him. Then the dreaded second job comes.

$67.83 or 66% Labor –ok

$229.95 or 31% Parts – ouch!

$297.78 or 39% Total

“Oh, this is bad” he thinks, “this is less than the 40% overhead cost he was warned about”. Now is a good time to start reminding the boss that mom will be upset if he starts yelling again.

But wait, let’s look real close at the numbers. Click here to see the actual Service Invoices on these two repairs.

In one hour, two cars were repaired, the first car made 67% profit on a $78 invoice or $50 of profit in one hour. The second car made only 39% profit on a $308 invoice or $117, again $117 of profit during one hour of labor.

When are we going to understand we can no longer blame the bankers, accountants and lawyers for our problems? Hold it, sure we can blame the lawyers, it is always their fault, but we can no longer blame the money men for your continued use of percentages to track your profitability.

Ok so now we understand completely why we can’t use percentages. Don’t even think about backing up and talking about how smart you are and with your experience you know what is profitable. No one is going to listen to you.

We’ve heard many different terms in the automotive industry and now let me introduce you to the Minimum Profit Goal or MPG/h. This is the amount of money that has to be made during a set period of time, in this case 1 hour. In the last two examples we made $50 per hour and $117 per hour but had we known that our own shop MPG/h was $70 per hour we might have had a different outcome. Can anyone imagine an emergency repair being completed within the first hour of business and having a retail cost of only $98? Most customers would have gladly paid $98 while you would have met your Minimum Profit Goal of $70 per hour. Not all jobs are susceptible to being changed but an emergency repair for under $100. I gotta think it’s doable.

How do we find our businesses Minimum Profit Goal? Some people think you have to hire a second bookkeeper a load of consultants and start tracking all of your business numbers. That would be correct, except for hiring a second bookkeeper and a load of consultants. You do need to track your business numbers.

How much money can I make?

To paraphrase a wise man, “if you ask the world for a penny, you’ll get it, if all you ask the world for is a penny then don’t complain when all the world gives you is the penny.”

The first thing you must do to determine your Minimum Profit Goal is to decide precisely how much money you wish to make. In this case, for the next 12 months.

Many people have been taught that the formula for gross profit is sales less the direct cost of the sales. Any accountant will tell you that that is correct but remember that we are not too fond of accountants around here so we’re not going to use their outdated formula. (Mostly because that formula is an historical formula dealing with numbers of the past.) Our new formula is every bit correct and deals with our future and our future goals. This formula is Gross Profit equals Net Profits plus Expenses. Now, in order to ascertain our needed gross profit for one year all we need to do is report on our expenses for the past 12 months and add into it our profit goals. The final step in determining our Minimum Profit Goal is to understand the true formula. Gross Profit per Actual Hour worked on vehicles or GP/Act Hr.

Most garages refuse to track the Technician time properly. Some actually break the law and track none of the time but most tracks at least daily time at the business. This is nonsense, a modern repair facility must be operating efficiently and the only way to do this is by tracking your ABCDW’s. Actual, Billed, Credit, Daily and Waste times. There are many ways to track this time but first we have to decide which number to track and why.

Daily time is the easiest number to track and coincidently the number that the State and Federal labor laws are based on. These should be tracked from the first day you hire your first employee. The next number you already track is the number of billed hours during any time frame. You most likely don’t actually keep track of these numbers anyplace but you could easily be using a spreadsheet to keep these numbers. If you deal with credit time now you are most likely do a great job with your number tracking. Credit Time differs from Billed time only when management decides to pay the tech more or less than the billed hours. A good example on why that would happen would be when tech B repairs a vehicle under internal warranty (comeback) when a tech A did the original repair. Tech B get paid for the repair time yet the customer is billed nothing for the repair. Waste time is all about justifying the time not spent working on cars or trucks. Everything from coffee breaks to waiting for the authorization to repair, from fixing air hoses to getting the furnace working on a cold winter morning. Waste time does not condemn the technician as much as it locates inefficiencies in the business itself.

Now on to the most important number for a repair shop. Actual time spent working on the vehicle. This number is directly in your control. If your marketing doesn’t work and you don’t have enough to work on this number will be low. If you don’t properly get authorization to repair the vehicle and you must stop working, this number will be low. By definition if you have low actual hours you are called an inefficient shop. How much time is lost in the average shop? Well we all know that there is no average shop, yet you can routinely find shops that lose 3, 4, 5 hours in a 9 hour day. What are your numbers? Easy to guess, hard to know for sure without actually using a time clock. Scary for the average shop.

The number one reason not to track actual hours is… Well, it’s more of a culture thing. Most shop owners are former technicians and technicians know that they only get in trouble when the numbers are against them. 99% of all dealerships require their employees to use a time card. The factories only pay warranty diagnosis in excess of 0.2 with documented time. As long as the shop owners don’t use the time clock as a stick, the implementation of shop time tracking goes smoothly.

The major causes for low actual time in shops across the nation start off with not using a tracking system (what you don’t track you cannot manage.) Quickly the front office becomes the focal point. Not being prepared with the next repair at all times, not having the parts in the house when it’s time to install, not having authorization to proceed, and not being able to contact the customer in a moments notice. These areas can all be managed and must be managed in order to efficiently operate a modern automobile repair facility.

After reading all the right reasons for tracking actual hours let’s remember the most important reason. Billed Time is only a number being used to justify your selling price. Real time, Actual time is the only time that your shop makes money with. That is what you sell, Time.

Once these numbers are being tracked you can easily determine on a monthly basis exactly what your Minimum Profit Goal is by dividing your Gross Profit from the earlier formula by the actual time spent working on cars during the last 12 months.

This may all sound complicated and time consuming but in fact with the proper tools these numbers can be figured the first time through in about 15 minutes and there is no extra time on individual invoices.