By Joe Marconi, an Elite Blog - 

A recent Small Business Administration (SBA) report revealed that one of the main reasons for small business failure is due to a lack of financial knowledge. Another survey, also conducted by the SBA, found that 83% of failed business owners stated that their failure was due to cash flow problems. While there are many facets to operating a successful auto repair business, one thing that is common to all is that it needs to be profitable.

The fact is that too many auto repair shops struggle financially. The sad news is that most of them actually have a booming business that is clouded by their financial woes. The typical auto repair shop has consistent car counts, a calendar booked out for at least a few days, and in many cases, booked a week or more. Where so many auto shop owners fall short is understanding their financials, more specifically, not focusing enough on generating consistent profit and improving cash flow.

In this blog, I will outline five proven tips to help you increase your bottom-line profit and improve cash flow. Becoming financially stable also improves your personal life and the lives of those you employ.

Understand Your Financial Reports. Establish Your Financial Goals

There are three main accounting reports that you should have a basic knowledge of: The profit and loss statement, the cash flow statement, and the balance sheet. Most auto repair shops either have an in-house bookkeeper or an accountant to generate these reports. It doesn’t matter who updates and runs these reports, as long as they are reviewed by you, the shop owner, periodically.

Have regular meetings with either your bookkeeper or accountant and become familiar with your financial reports. You do not have to understand these reports as well as your bookkeeper or your accountant does. However, the more knowledgeable you are about your financial reports, the better financial decisions you will make, which will make a difference to your bottom line.

Performing an in-depth analysis of your financial reports will give you valuable information on the financial strengths and weaknesses of your company. This information is crucial when establishing your financial goals. Having financial goals is essential to your company’s future. Share your goals with your entire team and brainstorm collectively to find ways to achieve them.

Focus on Gross Profit, Not Total Sales

When shop owners get together they typically share their year-over-year sales increases. While total sales revenue is important, it doesn’t tell the entire story. And it may not reflect the true financial health of your company. If you had a choice, would you rather have a 1.5-million-dollar business that produces a net profit of $50,000, or a one-million-dollar business that nets a profit of $175,000? The answer is obvious. Why? Your bottom line net profit is what truly matters, not the total sales number.

To have a healthy net profit requires that you have a healthy bottom line. Gross profit is the amount of money left over from your total sales after paying your technicians and paying all the costs of sales items for all work performed. The higher the gross profit, the higher the net profit. Gross profit is important because it pays for all other operating expenses and loans. After paying all your operating expenses, what’s left over is your net profit. Depending on your business model, typically, auto repair shops look to attain a net profit of 10% to 25%.

Improving your bottom line requires that you properly establish your labor and part profit margins. While there are benchmarks for the average auto repair business, the margins you set for your company may be different. With that said, we usually want to see 40% to 55% part profit, and a 70%-plus labor margin. A good number to shoot for is a 60% overall gross profit for parts and labor.

One more thing to consider when calculating your gross profit requirement: Your operating expenses need to be in line too. Keeping your expenses in line by cutting excess and waste will lower your operating expenses and increase your net profit.

If you are not sure how to calculate your margins properly or need help with maintaining your expenses, speak to your accountant, or seek help from a qualified business coach.

Improve Quality and Total Shop Production

During the Great Depression of the 1930s, Chrysler gained market share and financial stability by improving production. While other car companies were looking for ways to cut costs, Chrysler made a bold decision to focus on building more affordable cars and improving overall efficiencies. Their strategy was to produce more cars with the same labor costs. This ultimately resulted in increased sales and profits. It also propelled Chrysler to become known as one of the “Big Three” automakers, along with General Motors and Ford.

Improving workflow production in your auto repair shop by utilizing the same direct labor cost will result in increased sales and profits. Essentially, improving productivity by using your current workforce means more work is done in a given period.

Shop owners, take a long hard look at your overall workflow processes. Track all the steps your technicians are taking throughout the day. Are there wasted steps that can be eliminated? Are there bottlenecks in the service advisor process? Are your service advisors properly trained in the art of sales, and in delivering exceptional customer service? Improving your total shop production and quality will result in increased profits.

One last word on the topic of production; look at your shop layout. Are tools, equipment, and information systems easily accessed? And let’s not forget how continuous training for all employees is a key component in delivering consistently high levels of quality and productivity.

Build More Profitable Estimates

Years ago, we used to say that technicians have control over their efficiency. This may have been true to some extent, but today there are too many variables. Let me give you an example. Your service advisor wants to sell exhaust manifolds on a Chevy pickup truck. The published labor time in her business systems calls for 1.7 hours per side. However, all the studs are rusted away which will require drilling and installing new studs, which is probably a 6-hour job, or more. If the wrong labor time is sold, there will be no way the technician can complete this job in the labor time sold to the customer.

Sometimes you need to close the book, and openly discuss with your technicians the true labor time based on experience and the individual scenario. There are too many published labor times that are not correct. Increasing billed labor hours is perhaps one of the best ways to improve your bottom line.

Control Account Receivables and Inventory

Controlling your account receivables will not affect your gross or net profit. However, it will impact cash flow. Essentially, high account receivables reduce the amount of cash on hand. Available cash and profit are not the same. Your shop can generate a net profit of $25,000 for the month, but if your account receivables are $35,000, you will have a $10,000 shortfall of cash for that month.

Most auto repair shops these days do not have an extensive inventory. Exceptions are repair shops that stock tires and shops located in extremely rural areas. Even if your inventory is low, pay attention to it. Limit your inventory to only those items that move fast. Having old stock sitting on a shelf reduces your available cash. Another important task is to ensure that your inventory pricing is up to date. Charging out-of-date prices are losses that go under the financial radar and will hurt your bottom line.

Conclusion

Most shop owners have their vision of a successfully-run business. This vision includes providing a healthy work environment for their employees, providing training and equipment, and having a clean and customer-friendly facility. Additionally, shop owners want to provide a benefits and pay package that attracts and retains the best employees. And of course, the owner must be able to earn a respectable wage too. All this requires profit.

At Elite, we understand what auto shop owners desire from their businesses. We not only provide the business tools, one-on-one coaching, service advisor training, and peer groups that we know will help take your company to the next level, but we accomplish this in the most honest and ethical way.

Zig Ziglar once said, “It is easier to explain price once than to apologize for quality forever”, and I agree completely. The fact is that you must have great people and procedures at your sales counter. You may have the best diagnostic equipment, tools, and talented technicians available and it is useless if you are not bringing your “A” game at the front counter. Does your shop have an organized, talented sales team? Do they have clear guidance and training to make it all happen? What golden rules do you hold sacred at your sales counter?

Here are Four counter measures that will insure success in accommodating your clients:

• Great relationships: Your service advisor must develop great relationships with your clients. They must be easy to like, smart, and organized, to say the least. A great service advisor should go out with the client and walk the car to take notice of things that interest the client. Look for NFL team stickers, NASCAR items, baby seats, free mason logos, military stickers, or anything that can help establish a connection. As your service advisor develops relationships they will build trust and credibility. At the same time you should give the vehicle a good look. Are the tires worn evenly? Do you smell any burning fluids? Keep your eye out for any body damage, scratched paint, or broken lights. Casually mention any noteworthy observations. Giving this kind of time and attention to your client will pay huge dividends.
  
• Good intelligence: Getting a good problem statement is so important. So many clients want to over simplify what they tell the service advisor. The reason is either they are not detail oriented or, more likely, they believe the simpler they make the problem sound will determine how much cheaper the repair will be. This is where great service advisors earn their stripes. A few minutes harvesting a good problem statement at the counter can literally save hours in the shop. One of the best ways to get the desired problem statement is by asking open ended questions. Here are a few examples;
  

• When was the car last working correctly?
  
• Then what happened next?
  
• What else happens when the car symptomizes?
  
• Under what conditions does the car symptomize?
  
• What does the noise sound like?
  
• How big is the puddle? After how long?
  

This line of questioning will take its own course through the service advisor’s experience and analytical mindset. The result will be a spot on problem statement.

• Analyze the information: Gather all the information on your client’s vehicle and assemble it into a logical plan. First, take the diagnosis of the problem the vehicle came in for and turn it into a complete estimate. I emphasize “complete” because so many shops miss the boat right here. Many shops will do the minimum repairs that are needed. These are shops that are worried about car count instead of making the cars count. Remember, we are going to solve the problem not fix the symptom. Always think in terms of concern, cause, and correction. Organize the results of the diagnostic and the inspection into the following format;
  

• Needed repair: This would be what you recommend doing first and why. For example, front brakes that are metal to metal. You would probably recommend calipers, rotors, pads, hoses, rear brake clean and adjust, as well as a brake fluid flush.
  
• Reliability: These recommendations might include C.V. shafts because outer boots are cracked, but not broken, serpentine belt and tensioner that are worn, but still operational. Things that must be done soon, before reliability is compromised.
  
• Preventative Maintenance: These are maintenance items you recommend due to mileage or that are indicated on your inspection. Some possibilities may be a tune up, timing belt, struts, radiator hoses, or transmission service.
  
• Economy: These are things that are recommended for better economy, like a fuel injection service, air intake cleaning, air filter, or oxygen sensors. These would be the finer points that really put your client’s car into top shape.
  

• Presenting the plan: Always lead with the good things you found during the inspection. Compliment them on keeping their vehicle in good repair. Next address the items that need to be repaired. Explain why you are recommending these items. Going back to the brakes; We recommend the calipers because they are seized, the rotors are ground beyond specification, pads, hoses are old and could be breaking down internally, the brake flush is needed because it’s overdue and the grinding brakes most likely boiled the fluid.
  

The most important part of presentation is the recap. “So, Mrs. Jackson, to do the brakes with calipers, hoses, and brake flush, which includes our 12/12 Nationwide Warranty, tax and everything we discussed would be $472.00 total, out the door”. “We can have that done by 4pm today”, then shut up. At that point you will usually get the authorization to proceed with the recommended repairs. Always under promise and over deliver! You will build trust and credibility with your clients by providing them with the services and information they need.

In a world where service advisors don’t want to be considered salespeople, we need to search our souls. Why is it that “selling” has become a dirty word? Why is it that we cringe at the term “sales?” It’s simple! Most service advisors do what they do each day because they care about people. To become a “salesperson”, in their mind, means to become pushy and overbearing. To most, it means that their interest must shift to one thing and one thing only… The customer’s Visa card! So, what’s the best way to overcome this misperception? First and foremost, we need to get something clear: Selling is helping people through a difficult decision making process.

Let’s face it: Many of our customers are poor decision makers. How many times do customers come into your shop, only for you to discover that they’ve been neglecting their vehicles? In many cases, this is because a service advisor has never helped them truly understand the value of vehicle maintenance. These customers who have a pattern of making poor decisions are the ones who need our help the most! True salesmanship is always going to put the customer’s best interest ahead of everything else. If selling starts violating ethics, in my mind, it is no longer selling; it’s stealing.

Over the years as an advisor, I discovered that in most cases, a customer’s decline in vehicle maintenance happens slowly. This gradual decline can be primarily attributed to the failures of the advisors. Rather than genuinely caring about what’s in their customers’ best interest, service advisors are acquiescing to their customers with the attitude that, “It’s the customer’s money, it’s the customer’s safety, and he can do whatever he wants”. This is the easy way out; the path of least resistance! We need to ask ourselves…is this right? What if this customer was your grandmother or your daughter? Would you just roll over and accept that they made the wrong decision? Of course not!

So, where do we go from here? Well…service advisors need to become true salespeople. In large, sales skills come into play once you really grasp how people behave and react in a buying environment. When we sell auto repair, we have to keep in mind that we’re selling something that isn’t pleasurable for people to buy! Many times, we’re also selling an intangible. Talk about tough! We need to learn how to sell in a way that helps our customers see the true value of each service, because in order for the customer to authorize the service, the perceived value of that service needs to exceed the value of the money the customer will have to spend.

We always need to ask ourselves, “How will the customer win by saying, ‘yes’?” This is, after all, what your customers care about most, in that they will always be thinking, “How do I benefit?”

If we, as salespeople, can master selling benefits instead of parts and labor, then we’re one step ahead of the crowd. Let’s work together to help our customers, because they need us! After all, we are the experts… right?

This article was contributed by Doris Barnes of Elite, a former industry-leading service advisor who currently heads up the Elite Masters Service Advisor Training Course.