It means we will start to experience some behaviours and common views, particularly in the way we measure our businesses. For example, our management measurement is moving rapidly towards a mathematical measurement format that tells us what is truly going on within the business itself. The numbers actually start to talk to you.
In simpler terms, it means a series of numbers is formally assembled in such a way that the outcome of adding all those number terms together: a1 + a2 + a3 + tells management the things they are doing right or where trouble is looming.
Traditionally, most shop owners and managers have been taught to measure their business by watching their sales, their gross profit percentages and their bank balance. This format worked reasonably well to a degree until the early 1990s. At that time uni-body vehicle structures hit the industry along with direct fuel injection and front wheel drive. Carburetors disappeared and complete new braking systems came to the forefront of vehicle technology and shop owners wondered how they would survive. These were the very first signs of the break down and repair world disappearing. The automotive industry was transitioning itself to a maintenance platform with new design and quality which gives vehicles better safety and reliability features for the consumer.
“The times, they are a-changing”
In the independent shop management concept, measurement methods have had to change as well. I would estimate that 95% of the independent shops within the Atlantic region still hold on to cost accounting methods because they are dealing with an average accountant that really doesn’t understand this type of business. They have not been trained in how we should be measuring this business in order to maximize bottom-line profitability. They are not aware of the necessary ratios and business guidelines the independent automotive service shop must study to determine the important trend lines which tell us where the shop is headed and how to turn around key numbers where necessary to obtain the desired results?
Shop measurement has moved to a “management accounting operating statement and analysis” format. This allows us to measure key items internally within the business that directly affect bottom-line performance. This format also shifts the measurement from a break-down and repair shop mentality, where watching sales, gross profit percentages and bank balances is of prime importance, to the maintenance and service world, where we start to measure team productivity, billed hours and total site efficiency numbers as well as other key measurements on a monthly basis. This format recognizes that we are now in a knowledge-based business and not focused strictly on the commodity side as so many shops still are. And they wonder why they cannot make more money by just increasing their sales.
PAGE 1 breaks down the revenue in detailed criteria that was determined to be key revenue measurements, allowing management to make accurate and decisive decisions regarding the business. Breaking out your revenue in a certain way is now important. For example, breaking out aftermarket parts, dealer domestic and dealer foreign plate parts allows us to determine the business trend for type of technical training required, type of equipment and manufacturers and Internet website access required coupled with how much diagnostic billing time is available in the shop. Notice that it compares to predetermined objectives and then flows through to whether the shop is over-or-short of the objectives. The information is then reworked to show how the numbers are developing to a trend line the business is on by its year-end if things continue as they are. This is valuable information to know as changes can be made to affect the trend outcome.
PAGE 2 compares total shop gross profit percentages in various formats such as “total bay gross profit percentage with no tires” and “gross profit dollar comparison” as well as “total shop gross profit percentages and dollars achieved”. Measuring gross profit is important because shop expenses are paid out of gross profit dollars, not sales dollars and the gross profit percentage (without tires included) of a successful shop today should be at least 75%. When tires are included in the calculation, the shop should be achieving 70%.
PAGE 3 covers all the operating expenses and net income before depreciation of the business in detail as compared to an operating budget set with accompanying over-or- short-of-budget columns, percent of annual budget used and the numbers reworked to calculate the trend line, net income and operating expenses are on by year-end if things remain as they are. Breaking out key expenses is important to ensure the shop is not being wasteful but also expenses, when discussed line by line, will start to show how common sense is required when reviewing expenses to deliver consumer quality and value while driving a desired bottom line.
PAGE 4 measures certain balance sheet items as well as stating inventory levels by category compared to preset objectives. Inventory is measured and managed differently today as we move to a stocking measurement that makes sense in these economic times, compared to the old general inventory rules that basically saw items gather dust.
This page also states the various tier labour rates of the shop. Shops today require a minimum of three labour rates. Many of the better shops are now at five or even six door rates. Invoice information is assessed coupled with tracking the number of new customers for the month and year-to-date. Tracking new customers allows us to measure how effective any marketing is and allows us the opportunity to measure “why” they came in.
PAGE 5 measures results to preset business objectives such as tire units sold, labour-to-wage ratios, labour-to-parts-sold, part sales mixes, inventory turn/earn indexes as well as site efficiency analysis measured back to the potential of the business. Tire sales are important in today’s independent shop and this topic must be understood properly. Tires also can throw the business off balance when management is not focused on the right criteria.
Labour production is important to measure against the entire wage package of the shop and in relation to the total parts sold in the business. Unfortunately, cost accounting measurements do not bring in these important criteria properly for analysis purposes.
Inventory is now measured with a turn/earn index format compared to the old category turnover rate measurement. It is important to use the shop monies wisely to maximize net income. The turn/earn index measurement allows management to achieve just that when discussing inventory.
PAGE 6 analyses the labour component determining effective door rates with each labour tier, invoice analysis, billed hour analysis and much more finishing off with cost-per- billed- hour analysis. Effective door rates must be understood because it is out of this number that technicians and overhead are paid. Unfortunately 95% of shops believe they are achieving the door rate they are charging but they are so far away from it. Billed hour analysis is critical to measure how effectively and professionally we are serving the consumer. Once this measurement is understood a plan can be put into place to shore up weaknesses that cause stress and consumer mistrust. The cost-per-billed-hour is a number that every service advisor should know regarding the shop they are working in and be trained how to use that number when making up a repair order/invoice. Management should report this number each month to the front counter. Again most shop owners/managers just cross their eyes and say “What is that for?”
As you can see and appreciate, much more detail about the business is required today on a monthly basis. Management must have critical information at their fingertips on a monthly basis in order to make the right decisions based on factual information compared to the emotional bank account decisions made in the “old days”.
To own, operate and manage a shop today is a true business profession. “The devil is in the detail” and it is the detail that counts so much in proper shop business measurement today in order to make the right business decisions to move the business forward.
A convergence in shop management evaluation is taking place and if your business-- whether it’s a two-bay or a 30-bay operation--is not measuring correct criteria and doing it accurately, you can not manage the business to maximum the net income opportunity.
Convergence in the aftermarket means consolidation. Consolidation means change. Change means fine tuning and agreement on the key measurements that now account for the business we are in today.
Have you overhauled your business measuring processes to reflect the changing business we are in?
Robert (Bob) Greenwood, AAM is President of Automotive Aftermarket E-Learning Centre Ltd. in Abbotsford, BC. Telephone Toll Free: 1.800.267.5497, web Site: www.aaec.ca
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