Planning for profit in 2021

Planning for profit in 2021

Planning for profit in 2021

While Tire shops experience a drastic decline in business come January there is an opportunity to make very good use of this time.

Reflecting on your previous years’ performance is one of them. This is the foundation of a forecast for your up-coming year.

If you had a terrible year in 2020, then great it’s now behind you.  You have the opportunity to learn from the experience and the ability to analyze the impact of your decisions.

Looking at prior years’ financial performance is hindsight that can be used as foresight, you now have hindsight 20/20 vision to leverage your shops performance for 2021.

A budget is a guide of what to expect in the future; however, our industry (the accounting profession) is moving away from the static budget and embracing the dynamic rolling forecast.

The difference with a rolling forecast is the fact that we create a basis for our future year, broken down by month and smoothed out over a quarter (since weather tends to fluctuate over the season, quarters are the perfect smoothing timeframe for a tire shop forecast) and we change it as new information arises.

Changes like a global pandemic on the closing of the first quarter in 2020!

How to create your forecast for 2021

Print out your 2020 monthly income statements/profit and loss statement, for March and April use 2019 data.

Apply goals to each month, based on consultant or franchisor provided figures, if you don’t have any you can request my Ideal Tire Shop Benchmarks.
Go to https://pdcauto.com/ enter your information in the section that says “Download our free financial benchmark diagnostic” and it will be delivered right to your inbox.

Now it’s easy as 1, 2, 3…

  1. If you don’t meet the best gross profit margin % targets on parts and tires start with bumping up those sales figures based on achieving those targets (that’s just leveraging better markup with existing customer work)
  2. Increasing sales by factoring in more work sold on inspections and
  3. New customers.

Additional considerations

At year-end I always ask owners to evaluate their Capital Assets.

  • Is machinery in the shop in good shape?
  • Do you need new hoists or other expensive equipment?
  • Does the shop need any repairs or maintenance?

Considering record low interest rates I recommend funding these acquisitions on credit.

If you have existing loans, evaluate refinancing plans; speak to your banker and and possibly other institutions to shop your business around and obtain the best rate and financing plans for your business needs.

***Note also that considering the impact of Covid on 2020 financials, I’ve been having success submitting future forecasts as an additional consideration on lending applications. ***

Same for your business insurance, with rates expected to increase now is the time to shop around.

Cheers to a successful 2021!

P.S. – If you want to learn the secret to maximizing the bottom line of your business while working less hours in it, then join me Thursday January 21, 2021 for a complimentary live webinar.

This 45 minute investment of your time has the potential to radically improve your shops financial performance and your personal life.

Register here “How my shop clients earn more bottom line profit and work less hours in their business, by relying on 4 key financial reports and one foundational operating principle.”

Leverage service writers time in December for a successful 2021!

Leverage service writers time in December for a successful 2021!

As things quiet down in December, make use of the lull and gear up for success in the New Year; and I don’t just mean by setting up an awesome tire Christmas tree, though it might be fun :).

For my tire shop clients, we have a fun holiday “apres work” and learning session either right before the holidays or in early January.

Creating a social fun atmosphere that gets everyone in a good mood sets a positive undertone and opens people up to learning and accepting change; especially at the close of the busiest quarter of the year.

We begin with a review of the quarterly performance for the shop, we’re discussing the results of the targets we discussed and set in September for the up-coming quarter. We are only looking at the shop as a whole, individual performance is reviewed weekly with each service writer.

I am only presenting information and I solicit feedback from the group because they have the “in the trenches” expertise to shed light on the financial results.

Engaging your team demonstrates you value their input, they are your front line, they know your customers and they know why things came in where they did.

I ask the team what could we have done differently to 1 – increase the top line sales 2 – improve the gross margin % on each product type category.

Writing down the teams ideas and goals sets the stage for our 2021 targets.

This approach often surprises owners as the results from the team are ambitious and elicit pride and motivation to attain the goals and targets they set.

We review the product pricing matrix; I ask them to identify where we can tweak things to improve margins.

We look at the product sales mix to see what tires or products we want to focus on next year to increase margins further.

They share all the challenges they encountered so we can discuss solutions and best practices.

Typically challenges and “wishes” result in identifying shop management software features that we could leverage going forward and the team gets back to the shop with high spirits and motivation to implement everything we discussed.

All this self-reflection and evaluation is performed by the team, I simply facilitate the conversation and steer it where it needs to go.

People are significantly more likely to want to achieve the goals they set for themselves rather than those management sets for them!

P.S. – If you want to learn the secret to making your time working in the shop more deliberate and focused on maximizing the bottom line of your business, then join me Thursday January 21 for a complimentary live webinar.

I promise this won’t be death by Powerpoint!

This 45 minute investment of your time has the potential to radically improve your shops performance and your personal life.

Register here “How my shop clients earn more bottom line profit and work less hours in their business, by relying on 4 key financial reports and one foundational operating principle.”

Profit is NOT a dirty word!

Profit is NOT a dirty word!

Profit is NOT a dirty word!

I was on the phone with my father in law yesterday talking about the importance of a Product Pricing Matrix (PPM) and accelerated profit margin % on low cost items (I digress…more on this topic in a later post 😉).

We are so on the same page when it comes to the importance of the psychology of a shops business culture because it determines whether service writers have the confidence and support to follow the PPM and quote appropriately on jobs.

In management we refer to “the tone at the top” of the organization, this is the leadership (owner/GM) in an organization that literally leads by example and ends up defining the “culture” of the company.

Owners and leaders who are serial discounters are creating a culture of discounting.

There are 2 major fall outs that come from this behavior

  1. You’ve just trained your employees and service writers to use discounting to win customers over, rather than stick to the PPM
  1. You’ve just trained a new customer to expect your shop to give them a “special discount”

Why do owners do this?

They’re eroding profits from their own business, this impacts the owner’s ability to give pay increases, buy new equipment and in their personal lives impacts their ability to draw more income personally out of the business.

Coming from working with companies that hired me as a Financial Controller / CFO, these entities were already growth focused and monitoring profits and margins was the focus of executive discussions in the meetings I was involved in; so why am I repeatedly faced with shop owners who literally discount their own bottom line?!?

My father in law told me that on his first job on the parts desk at the GM dealership in Kamloops BC, the owner had a talk with him and explained to him that “profit isn’t a dirty word”, it is their duty to earn profit so that the service department can operate.

He was fortunate to learn early on in his career the importance of managing the bottom line with the careful monitoring and planning of the parts purchased and the product price matrix.

45 years later and semi-retired (he continues to operate his side business “hard to find parts”) he has worked in various dealerships managing the numbers, but more importantly the people.

Kevin (that’s my father in law) understood that regardless of what PPM was in place, he had to earn the respect of the people under his charge and guide them to respect and value the importance of the margins that were set-up.

And of course, he had to lead by example.

I writing an article on leadership right now. It is foundational in the success of change management in organizations and so for my shop clients to achieve their goals, they must be able to lead their team to execute the plan.

 

 

 

Value pricing for tire and automotive maintenance shops

Value pricing for tire and automotive maintenance shops

On average, tire dealers are earning around 4% net profit and many times they don’t realize their true net profit until many months after the close of their year-end.

I used to be dismayed, but not surprised, when a client would ask me in the meeting to present their year-end financial statements with “how did I do?”.

As an entrepreneur myself I can appreciate how overwhelming it is to run a business and “wear so many hats”, but one area that all entrepreneurs must understand and work on is their bottom line.

As the owner, you are the only one in the entire business (unless you have a controller or CFO) who will ever look at the big picture and ensure the business remains profitable.

By the time you’re sitting across from your accountant it’s too late for you to do anything to improve your shops performance for that year; which is why we shifted to a model of working more closely with clients to evaluate their business’ performance regularly.

Learning to pull meaningful reports from your shop management software and point of sale (POS) system is crucial, knowing monthly/weekly or even daily what your net profit for that period is allows you to immediately investigate the root issue and fix it!

There’s no secret to how you improve profit; You either increase sales, decrease expenses or both.

However, it is a calculated skill to make the appropriate changes based on industry standards and careful analysis of your current position.

Which brings me back to my point of value pricing.

When shop owners tell me they are priced to the average in their market, what I hear is they are “stuck” competing with other shops by keeping their labour rates down, but if you are the type of business owner who:

  • invests in your technicians skills with training and certification
  • buys quality diagnostic equipment
  • maintains excellent quality on the service you provide

Then you deserve to charge more for the value you are providing. It costs money to invest in all of these things and you must pass on these costs through to your customers who also value all that you do for them.

You’re in the business of providing a professional service and most of your customers (I know I’m certainly one of them) appreciate this superior service and reliability; it is the reason we keep coming back.

I have so much faith in my repair shop because I know they are honest, hard working people who take pride in what they do.

I never have to question the details of a quote because the service writer explains to me in detail what my vehicle requires and the nature of why additional labour time or expensive parts are required to do the job.

Now, I know what you’re thinking, I am not everybody! Well you’re right, but the majority of your customers probably are.

Don’t let the minority of people who complain and price shop be the driver for your pricing decisions.

Focus on the customers who value you and your superior service, they’re the ones who keep coming back and who will refer friends and family to you.

The people who always complain about pricing, guess what, they’re never happy and they will always complain; be courteous, but be firm with your pricing.­­

With a potential recession on the horizon it is important to take the time to understand the financial position you’re operating at, where you need to be to “break-even” and then set targets to earn a net profit that can sustainably maintain your business and your personal lifestyle; not to mention position the value of your shop for an eventual sale when you are ready to retire.

Some attainable metrics that my clients whom I work closely with to create future forecasts, benchmarks and measure performance are attaining net profit of 20%.

I tend to work backwards in this respect that I calculate the current net profit first and reverse engineer everything else around it to determine the ideal plan moving forward.

If you are ready to take your shop to the next level; To achieve the earnings you deserve for all the hard work you and your team put in, then email us to schedule a free 10-point financial inspection.

Break-Even Basics

Break-Even Basics

Break-even means your net earnings are exactly zero, you haven’t earned a profit or a loss.

Knowing this figure, essentially knowing your fixed costs in your business just to keep the doors open and everyone employed, allows you to calculate your minimum gross profit required to operate.

This is useful information in the event of a pandemic or other unexpected economic crisis, so you can pin point when and how you might need to adjust your business to survive.

Using break-even as a benchmark to know what changes you’ll need to make to target a particular profit goal in the future is how shop owners can plan for success and develop more specific goals for service writers and the shop.

The first thing you need to know is your total fixed costs.

These are all the expenses that your business incurs whether or not you make any revenue.

Typically, this is everything below your gross profit and if you look at your accountants financial statements you’ll have a more accurate figure that includes your income tax expense; also if you pay yourself in dividends, then you’ll need to add this to the expenses.

Shop labour might not be included in your expenses, though it really should be since it is a fairly fixed expense; If your shop labour lives up in Cost Of Goods Sold, then add that figure to expenses as well.

So we have:

Expenses + Income Tax Expense + Dividends + Shop Labour = Total Fixed Expenses

So in order to keep the doors open and continue to operate you need to earn Gross Profit = Total Fixed Expenses (At Minimum!).

Now figuring out your gross profit based on how much sales you need is a matter of understanding your average gross profit margin % (points) on your sales.

This next part is crucial to understand and I sometimes see shop owners mix this up.

To calculate this take Gross Profit and Divide by Sales so:

Sales$1,000,000
Cost of Goods Sold (COS)$    600,000
Gross Profit (sales – COS)$    400,000
  
Gross Profit$    400,000
Divide by Sales$1,000,000
Gross Profit % (Points)               40%

 

So with average gross profit % of 40% (that’s the average points on sales) then to achieve the minimum break-even of let’s say $500,000 then the shop calculates sales required as Break-even/(1/40%). So 1/40% = 2.5.

This 2.5 is your multiplier that you must multiply by your break-even :

Break-even$   500,000
X’s (1/40%) or 2.5              2.5
Sales required =$1,250,000

 

Knowing this figure and breaking it down further by quarter (need to ensure you have a large portion allocated to the Oct – Dec quarter and March – May) then you can really start to monitor how your business is performing.

If this is the minimum required to cover your costs, then you know any additional sales result in bottom line additional revenue.

So if your break-even is met then for every additional $1 sale you add $0.40 to your bottom line.

So if you want to earn $100,000 in net profit then you actually need to increase sales by $100,000 x’s (1/GP%) =$250,000

Additional net profit$  100,000
X’s (1/40%) or 2.5             2.5
Sales required =$  250,000

 

It’s easier said than done to increase sales by $250,000, and you have to consider other factors such as

  1. do we have enough space in the shop
  2. do we need an additional hoist/diagnostic equipment etc…
  3. do I need to hire another technician

There’s another important fact we aren’t looking at here and that’s the average profit margin % the shop currently earns.

See 40% as an average is very low and is not in line with industry averages.

The top performing tire shops we work with, earn an average of 60% gross profit margin% (remember labour is NOT in cost of goods sold, if you have labour in cost of goods sold then 40% is actually good, you just need to back out labour and see what you’re really at if you want to follow these recommendations).

So if the shop now focuses on improving average gross margin % even just by 2 points, keeping the cost constant at $400,000 (because we’re doing the same business as before, just with a better profit margin % or points).

Figure out our sales as our $Cost of goods sold/ (1-42% points target) = $600,000/58% = $1,034,483

Sales$1,034,483
Cost of Goods Sold (COS)$    600,000
Gross Profit (sales – COS)$    434,483
Gross Profit                42%

 

For every increase in average profit margin % (points) you are adding cash directly to your bottom line.

Now lets look at a top performing shops 60% gross profit margin and how that affects the bottom line

Figure out our sales as our $Cost of goods sold/ (1-42% points target) = $600,000/40% = $1,500,000.

Sales$1,500,000
Cost of Goods Sold (COS)$    600,000
Gross Profit (sales – COS)$    900,000
Gross Profit                60%

 

When I say top performing shops operate more smoothly, with less time working in the shop by owners and less stress for the team, it is this approach to focusing on strengthening the profit margins first that achieves these results.

Because tire shops sell 2 things 1 – Products and 2 – Labour we have to analyze what margins are now and strategize on how to make incremental improvements to improve the shops performance.

With our concentrated efforts working with owners and management to develop an appropriate Product Price Matrix and Service Code matrix; making use of the available settings in shop management software we can dramatically improve the profit margins.

How to maximize profit margins

How to maximize profit margins

PDC Auto profit margins

How to maximize profit margins

 

First things first, your service advisors must believe in the value they deliver to customers. When your team knows the importance of recommending appropriate repairs and services, then they feel good about their role in helping customers and are motivated to achieve goals that align with improving the bottom line.

How can shop owners and managers ensure their service writers are on board? Meet with them regularly and train them to understand your shops financial goals and the important role they play in meeting targets; better yet, create a compensation plan to reward them for achieving goals.

Also keep in mind

• Big ticket items will have a lower parts margin, but you’ll make more dollars per hour for the service

• While advisors have flexibility with respect to product pricing, ensure you have a product pricing matrix (see previous blog on this topic) in place as a guide; with your software rules settings turned on to automate the process

• Create incentives to discourage too much discounting, again bonus structures here can motivate service advisors to stick with your pricing matrix

• Focus on the sale of benefits of service v.s. listing parts and labour pricing to customers

• Minimize comebacks by selling customers the right service; this is a great team incentive to motivate technicians to diagnose correctly and rely on service advisors to book the next service

Ultimately, we can develop pay incentives and bonus structures to motivate service advisors and technicians to work together as a team toward a common goal, resulting in Increased Profit for the shop.

How to set and meet successful revenue and profit goals

I always recommend starting from the ground up. Working backwards to ensure we know the minimum gross profit required to cover the fixed expenses.

From this “floor” gross margin dollars amount, we can look at the net profit required to hit the company’s targets and how much more gross profit is required to meet this goal; whether it’s a plan to purchase new diagnostic equipment in the coming year or part of a longer strategy to increase share value for a sale of the business in 3 years’ time.

This information combined with best-in-class industry benchmarking, results in a “recipe” for average product margins, effective labour rate, and labour sales targets; carefully devised to produce a desired and realistic annual income statement result.

An important and often overlooked key to achieving success to hit your targets requires that Service Writers are provided with goals towards a specific mix of service types and parts sales.

Achieving the perfect combination of high margin service work blended with parts and labour sales delivers reliable gross margins to cover your fixed expenses and leave a healthy net profit to re-invest back into your shop.

Take the guess work out of goal development and build predictable forecasts that become your shops roadmap.

We work with clients across the country

If you want to work less in your business and focus on working on your business to make it more profitable, easier to run, and positioned for a sale, contact us and see how our team can change your life.

Contact Us

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PDC automotive accountants

Office Location

1593 Ellis St,
Kelowna, BC,
V1Y 2A7

CONTACT INFO

PHONE: 778-721-0536

FAX: 236-420-4184

EMAIL: milene@pdcauto.com