The Seven steps to garage profitability
Determining the health of your business is pretty straightforward. Deduct the cost of running your business from your revenue generation and you’ve made a profit. Upon closer inspection, this deceptively simple business practice can for many independent workshops be difficult to achieve.
With margins increasingly squeezed, it’s imperative you have a handle on your business’ performance on a regular basis. If your business has money in the bank, it doesn’t necessarily make it profitable and leaving it once a year when your accountant calculates your P&L could have catastrophic implications to the future well being of your garage.
Getting real with real-time information
You need to understand the profitability of literally every job that goes through your workshop, only then will you know which jobs make you money and which are losing you vital revenue. Knowing the value of each job you undertake from the cost of labour and parts to any directly connected marketing activity, can you be confident that each job has been priced properly.
Whether you are a small garage in a village or if you’re a large workshop with several ramps and large fleet contracts, the more information you have on your business’ productivity and profitability, the better your business will run and the less likely you will ever find yourself teetering on the edge of closure.
Deducting the amount you spend from your income to calculate your profitability may sound simple, but you will be surprised at how many businesses do not have a snapshot of their profitability at any given moment in time. Calculating this on a monthly basis means you can make adjustments to compensate when business slows, you will also be able to see if the changes you made had the desired effect.
Track your revenue
First of all, you need to calculate your company’s revenue which may arrive in your business via different routes although it will be mostly cards with some cash transactions. Keeping track on a monthly basis will help your understand how much and in what way your revenue is generated so you will need to link your transactions to the jobs undertaken.
Tracking your income is actually much easier than calculating your profit, so don’t fall into the common trap of just keeping abreast of your revenue. Using accounting software or cloud based software systems makes measuring and tracking much easier and you are less likely to be caught unawares and suffer cash flow problems. Accurate management accounts will help you stay on the road to profit which in turn will help determine if you can afford investment in the new MOT ramp you have your eye on to further boost your business.
Follow your costs
You will obviously need to add up your business costs. Some will be regular such as your wage bill, rent and rates, whilst others will be dependent on the tasks you have undertaken, the parts required will fluctuate and if you have invested in new equipment, it will have an immediate impact on your bottom line. It is imperative to have a full working knowledge of your overheads if you are to accurately calculate your profitability.
Fixed costs, like the rent, are easier to calculate than your variable costs which are linked to the amount of labour hours you sold. You can forecast your fixed costs for the next 12-months or so, these are unlikely to change significantly, but your variable costs depend on your productivity.
You will, however, be able to estimate the amount of labour hours you will need to sell on a monthly, quarterly and annual basis in order to meet your fixed costs and break even, you will also know how many labour hours, parts and accessories you need to sell in order to make a profit. Of course, this will not be as precise as your fixed costs, but this forecast will provide you with a framework.
Don’t get too bogged down in the terminology, whilst wages are a fixed cost because you know how many people you employ and how much you pay them, your labour costs are also variable and directly linked to productivity. But, you will still have to pay your staff if they are stood in the workshop twiddling their thumbs as you would if your garage has a steady stream of vehicles on the ramp. Similarly, your utilities bills vie between being a fixed and variable cost: undertake a marketing campaign where you telephone customers whose vehicles are due a service to boost bookings and your bill will be higher. Likewise, your electricity bill could increase alongside an increase in servicing.
Determine your pricing
If you know which jobs are the most profitable, you can concentrate your efforts in attracting more of this type of work. You may also need to adjust your pricing structure for those jobs which are not as profitable as they should be and you will be able to identify your most profitable customers and build in some value added service when they bring their vehicles in to your workshop.
Streamline your expenses.
Knowing the income of a day’s work or a particular job against the cost of completion, the price you charge and the profit you make will improve efficiencies and identify areas where savings can be made. Becoming more streamlined translates into profits. Look to reduce the number of your suppliers, for example, although in some cases delivery time may outweigh costs if you have a customer waiting for a vehicle to be fixed. Focusing on these aspects will help make your business much more efficient and cost effective. Don’t get too trigger happy, though, too much cost cutting and the quality of your workmanship and customer service could suffer thereby having a detrimental effect on your profits.
Seeing the big picture – The art of forecasting
Knowledge is strength. By understanding your profitability in minute detail, you will identify your business’ strengths and weaknesses thereby enabling you to build on one and improve on the other. Having the ability to forecast will help you make both short and long term plans and set achievable goals as well as creating a strategy to manage seasonal dips. There will be less obvious trends and some which are peculiar to your business or location, understanding how your business ticks on a within the context of a holistic view means you can prepare yourself for both the busy and quiet times.
Get ready to grow your business
Once you have gained an overall view of your business and you are in the habit of keeping tabs on your profitability, you will be in the best place from which to spring forward and develop your business. Growing your business requires additional staff and possible investment in your workshop, either way you will need to present a good business case to your bank or at least be able to justify it financially for your own peace of mind.
Leverage technology to provide insights
You can, of course, get to grips with the question of income versus costs and profits using spreadsheets, but in order to enjoy both the holistic view and drill down into the detail with specific reports on individual jobs or particular periods of time to help identify seasonal fluctuations, you really need a system which helps you see the wood for the trees. There are plenty of cloud based systems on the market which requires little investment in terms of hardware (think Facebook and LinkedIn – you don’t have to worry about development, hosting and security because a huge corporation does it on your behalf, working in the cloud is exactly the same) and you automatically enjoy the benefits of technological advancements.
Your path to profitability
Your profit is dependent on not only if your workshop is predominantly full, but if your income from labour charges and any profits on parts or accessories together exceeds your variable and fixed costs. You will also need to look at your own time investment in the business and calculate your own return for the hours you have put in. When you have determined your breakeven point, you will be able to understand the point at which your business becomes profitable. Profit is vital because it fuels growth and knowing how to increase profit without affecting the service you deliver means your business is more likely to be sustainable and that’s good for you, your employees and your customers.
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