Calculating your ideal labour rate

Calculating your ideal labour rate

I just finished a Profit Maximizing webinar with a group of shop owners.
Some great questions came up and I want to share one of my recommendations with you.
The question was “how do I determine what to set my labour rate at?”.
A profitable shop typically pay their technicians 25 – 30% of their shop labour rate; the other 75% to 70% belongs to the shop.
Here’s how to reverse that into a labour hour rate.

Method 1
Calculate what you pay your technicians on average, loaded (that means including payroll taxes).
Let’s say it’s $35/hour
Take the Hourly Rate of $35 and divide by 25% = $35/25% = you’d get a rate of $140.
Repeat this process but try the 30% end of the range = $35/30% = $117
Now you have a range to work within that relates to “industry” approximations.
This is a great rule of thumb, but because shops might have very different fixed expenses, I like to do this using a shops actual financial data.

Method 2 (caution you should ensure your financials are accurate)
Taking into consideration your shops actual expenses and your individual expectations for net profitability (lets use my target 20% from champion level aftermarket shops).
Using the following figures from my benchmarks document (recommending 1/3 of each tires to labour to parts sales):

Total expenses (including shop labour)$676,250
Total net profit (after owner wage)$248,750
Add back dividends (if you withdrew dividends)$Dividends
Total expenses & net profit & dividends$925,000
Divide by portion of fixed expenses that are covered by labour sales (in my case it’s 1/3)/3
Divide by estimated weeks open per year/48
Divided by estimated labour hours per week (9hrs x 6 days per week = 54 hrs/week)/54
Minimum required effective hourly rate =$119

I like method 2 because it is based on the real effective rate required for the shop to attain the “Maximum Profit” benchmarks I promise  to my shop owners.
Was this helpful? Do you use one of these methods to calculate your shop rates?
Cheers,
M

Want to know if we can help you attain 20% net profit? schedule a call with Milene

Which point of sale, shop management and bookkeeping software is the best for your shop?

Which point of sale, shop management and bookkeeping software is the best for your shop?

Now that shop owners have come up for air, I am finding many are asking me for recommendations on point of sale (POS) systems and bookkeeping software.

It only makes sense for me to write down my thoughts on this and share it widely.

There are a few key considerations to get you to the best software for your needs.

  1. Do you have an in-house bookkeeper?
  2. Does your bookkeeper work from home?
  3. Does your bookkeeper have training and experience bookkeeping?
  4. Are you operating in a multi-shop environment?

I find these are the factors that determine what I recommend to an owner.

You have an in-house bookkeeper

Usually if you have an in-house bookkeeper who comes into the shop office to do their work then you have the flexibility to use any software easily.

In my experience the most robust reporting software, for evaluating business performance from the Key Performance Indicators (KPI’s) and the benchmarks perspective is Costar.

Costar is easily implemented in a single store environment with an in-house bookkeeper.

If your bookkeeper does not work in the office regularly, then you might be using 2 software’s that can really (and should be) performed by one. (keep reading I will talk about this point in detail)

Bookkeeper works from home

If you use a part-time or outsourced bookkeeper and they don’t come into your shop to do their work, then a cloud-based solution is the best-case scenario for your business.

A cloud-based shop management software such as Protractor allows anyone anywhere to login to your POS/bookkeeping.

All that is required is an internet connection!

Many shops are in the unfortunate position where they have an in-house solution such as Costar, but the bookkeeper insists on performing their bookkeeping in a separate bookkeeping software such as Quickbooks, Quickbooks Online, Sage (among others) so they can work remotely from home.

This is my least favorite arrangement, as soon as you start exporting data from shop management software into a second software for bookkeeping you create 2 sets of books and this gets messy.

Half of the “bookkeeping” is automatically performed via the POS and the service writers when they order or receive inventory and when they make RO’s and sales.

The other half of the bookkeeping is performed in a separate software to reconcile, record expenses and then all this work is “imported” back into Costar.

There is now additional opportunity for errors and omissions on both export and import of information.

Which software at any given point is accurate? Neither! They will only ever be accurate for a single moment when the work is imported back into the shop management software and only as long as nothing is being done. As soon as bookkeeper and service writers start working in a software they’re immediately “not matching”.

This is more work and trouble than is necessary and if this is a situation you are in then I recommend you find a way out of it.

Does your bookkeeper have appropriate training and experience?

When I say that Costar is robust, that means it is also complex and requires excellent technology skills as well as excellent bookkeeping skills.

Often when I am asked to evaluate the performance of the bookkeeper it is most often the lack of expertise with the software (usually they weren’t trained to use it in the first place).

The good news here is that Costar has an excellent technical support team who can remote onto your bookkeepers computer and help them identify any issues they’re having.

Many times there are some minor tweaks to “set-up” issues that can rectify the situation.

Carefully evaluate the issue at hand before you make any big decisions; such as looking for a new bookkeeper, adopting a new POS/Shop management software or both.

Professional accountants are equipped to determine whether it is a people issue or a software issue.

Have someone help you with this, preferably an accountant with previous experience with your software.

Multi-Shop Environment

If you have multiple shops then you should have a sophisticated solution.

Either using cloud based software such as Protractor so your bookkeeper can access all of the shops data from their computer or using a remote server login option and Costar or Gemcar.

Making changes

If you are un-happy with the timeliness or accuracy of your financial data, then you need to investigate the issue further to determine the root cause of the problem

The basis of financial control and evaluation of your shop performance is the ability to see every angle of its financial results; for example:

  1. Margins by service writer for parts, tires, and jobs overall
  2. Technician productivity
  3. Technician efficiency
  4. Service code and product price matrix efficacy

If your software isn’t set-up correctly then you can’t accurately measure anything and it is extremely difficult to create meaningful targets and evaluate performance/achievement.

BUT and this is a big but.

Making a change to either the bookkeeper or the software is a massive undertaking and will possibly leave you “driving blind” for up to 6 months if implementation isn’t handled expertly.

I highly recommend seeking professional support from an experienced accountant who has performed implementation, set-up and worked with the particular software’s you’re using now or considering.

Evaluate carefully if anything needs to change.

Many times, people or software is cheaper and easier to repair than replace.

Just like maintaining a vehicle for optimal performance and longevity, you have to maintain your people and your software regularly to ensure smooth financial operations.

Would you like to receive free tips, articles and content directly to your inbox? Email me and type Yes in the subject line milene@pdcauto.com