Updated: Mar 10, 2021
All Your Profit Questions Answered with Cecil Bullard
We see A LOT of questions in the automotive industry when it comes to profit. So we're featuring a quick chat we had recently with Cecil Bullard, CEO of The Institute and an expert professional within the field. Here’s an overview of some of the most frequently asked profit questions and Cecil’s insight:
How do shops best judge whether they are profitable or not?
Well I think you’re looking at two different things. You’re looking at gross profit (we paid our variable expenses and what’s left in fixed expenses), but really everything is about net profit. What’s there after earnings, after taxes, what’s left in the pile.
That leads into our second question: are all profits good?
As long as you’re not doing anything illegal or not fulfilling your end of the deal, profits are good. I think it’s one of the problems in our industry that a lot of shop owners feel bad if they make any real profit in their business – like they don’t deserve it. And because it’s a small business, we need to earn more profit because we run fewer dollars through. So there has to be enough money in the bottom, in the pile at the end so it makes it worth it – it’s my life so it should be worth it.
So are there some profits that are better than others?
You know there’s this debate in the industry right now about gross profit dollars per hour or gross profit margin. Gross profit dollars per hour is the last, it’s the end result. So if I have a technician who works in that bay and we do X number of dollars out of that bay and our costs are Y, then we have gross profit dollars per hour, every hour they are putting out whatever that is. If you look at gross profit margin, gross profit margin is not that end result. Gross profit margin the difference between what you paid for that component and what you sell it for. So after I take my variable expenses, what’s left in that pile is my gross profit margin.
Now you can get the same results in the end. And my best example is when we talk about a company that doesn’t measure their parts and labor separately. So we’ll go into a company and we’ll look at the parts and labor and say “Wow, that fits our model. That works!” But our parts margin is very, very low and our labor margins are very, very high. Because we’re not measuring the difference between the two so when you put the two together the gross margin is still okay. But the problem is if my parts are low and my labor is high, my technicians are not getting paid what they should be getting paid. And they’re really making up the difference for our low parts margin with their labor – and I don’t like that.
So when you start talking about GPD, it’s all well and good, and that’s how I pay my bills. But if my gross profit margin is low, then I have to do so many more dollars to get that bottom result. In other words, if I want to make 10,000 dollars and I have a gross profit on my labor and gross profit on my parts, and a good margin – say a 60% margin, then I have to do a lot less business than If I have a 40% margin. Yes, I want to make a certain gross profit dollars per hour and that’s certainly how I pay my bills, but if I don’t have margin, I don’t have dollars. And I think that gets skipped a lot, especially in our industry.
If a shop were struggling with their profits, what would be some of the things you would have them change right away?
Well, of course, you look at what they’re charging hourly. The easiest thing is to raise your labor rate and in most cases your customers aren’t going to be too concerned with that. I’ve taught classes for tons of years, and I think in almost every class I’ve taught, we talk about how our industry is not charging what we should. For instance, my plumber probably charges me $250 an hour, my lawyer $600 an hour, and we still have shops in the industry charging $120 per hour who think they’re charging too much.
The second thing would be looking at your parts margin. A lot of service advisors and owners look at the cost of the part and are afraid to tell the customer that they got the part for $30 and will be charging $100 because the customer will come back with how they can get the part cheaper online. But you have to throw that away, because you have to make a certain margin in your business no matter what. And when you start thinking about doing as much business as possible – which I agree with 1000% - but you want to do good business. Business where there is profit. If I bring cars in and I make $100 per car, it’s so much easier to get to $1,000 versus if I’m only making $5 per car. It’s astronomical the amount of work.
And I think my father’s model back in the 60s and 70s was just work on a lot of stuff, keep your prices down, and hope at the end that there’s enough money. I think that’s an outdated, old model and today we have to understand our margins – what our parts margin is, what our labor margin is, everything.
Productivity really matters. If I have technicians sitting with nothing to do and I’m paying them, then I’m going to go broke. And if I’m not paying them, then they’re going to go broke. It doesn’t work for anybody. So productivity is one of the next big issues.
Last is average repair order. Are you really doing what’s right for your customer? Are you inspecting the car, finding all the things that should be found, and talking to your customer so they have the information to make a good decision.
And that all relates to value; these shops need to show their value. And when you’re showing your value the right way in your prices and the services you’re providing, then that’s going to show in your profits.
And there are different automotive models for different people, just like there’s different places to eat. There’s McDonalds, there’s Carl’s Jr., places like that, and you can keep going up and up until you’re in the nicest, most expensive restaurant. And most of us have eaten all of them, but when we are looking to impress or celebrate, we want to go to the nicer place. There are plenty of people who want to pay someone to really take care of their car and not have to worry about it. And there are plenty of people who don’t, who just want the cheapest price and just one thing done versus really maintaining and prolonging their car life.
That makes sense. How should a shop be tracking their profits?
I think you want to look at your business in different ways for different things. There are two things. Obviously, I need a profit and loss statement – an accurate one. And unfortunately, many shops don’t even have an accurate P&L. And that’s my monthly look, how I pay my taxes, how I know if we made profit or not.
It’s funny, even in my company, I look at my P&L and say, “Wow, that’s a lot of money…but where is it?” It’s not sitting in my bank; I invested it, I bought equipment, I remodeled, I did whatever. So all that money that looks like it is there, might not be there. It’s why you need a P&L and management reports. Management reports should be looked at regularly – like how much business is sold each day, your ARO, the numbers you know you need to stay successful.
If you could give a shop owner only one piece of advice about profit, what would it be?
Decide to make it and do whatever it takes to get there as long as it is legal, moral, and ethical. And I think what I’m talking about is learn. Get the knowledge you need to understand your business on a financial model. Because I think some shop owners believe the money is made by fixing cars. In essence it is, because if we don’t fix cars we don’t get paid, but the real money is made in the way you run your business.
You need to understand your numbers and how they come together to produce your bottom line. Because if not, you’re going to lose a lot of money and waste a lot of time. So that’s my piece of advice for shop owners.
Thanks to Cecil for his time and effort on answering the profit questions for this month’s newsletter. We’ll see you next month to talk about hiring new talent, keeping that talent, and educating the talent you already have in your shop. Sign up here and give us a call if you have any questions!