When John Shoemaker asks collision repair shops across the country about their financial goals, he is often told, “I’m going to increase company sales 10%.”
When he asks how, they instinctively say, “By doing more repairs.”
The business development manager for BASF Automotive Refinish Coatings North America said if you look at an average shop with $2.4 million in annual sales, a 10% increase would equate to $240,000 annually, or $20,000 per month.
“Using an average repair of $2,600 as an example, the goal would require around eight more repairs per month,” said Shoemaker. “That’s reasonable, but is it sensible?”
Shoemaker said that what is sensible is making more money on the repairs the shop is already doing. During a recent interview with Autobody News, he shared tips on how a collision repair facility can increase profits sensibly by making small incremental improvements. Much of this centers around changing a sale or cost by about 1%, which he refers to as “The Power of One.” Although it’s a small number, he said it can make a big difference to a business in terms of profit.
Six key performance indicators to help overall profitability: Sales per RO (repair order) Shoemaker often recommends that shops consider raising each RO by 1%.
“If an average RO is $2,600 and you increase that by 1 percent, it would raise the average to $2,626 or $26,” he explained. When you multiply $26 by an average of 20 repairs per week, it equates to $520 in weekly growth. Earning an extra $520 each week for 52 weeks will add up to an additional $27,040 in profit.
Effective Labor Rate
A body shop’s hourly rate is not necessarily its effective labor rate. Shoemaker said the effective labor rate is what a shop is actually earning. Although body, frame and mechanical work generally all have different labor rates, Shoemaker said often times shops bill insurance companies the body labor rate and don’t charge frame or mechanical labor. He advises shops to charge for the particular skill being used based on the education and training the particular individual has received.
“You need to make sure that you are charging your frame rate for your frame work, your mechanical rate for your mechanical labor and not including everything in body; that’s how you increase your effective labor rate,” he said.
In addition, he said by increasing your effective labor rate by just $1, a shop can improve its annual revenue by $31,200 based on an average of 30 hours billed on a $2,600 RO.
Effective Labor Cost
The effective labor cost---the hourly rate paid to technicians---works hand-in-hand with a facility’s effective labor rate. Shoemaker encourages shops to bring in lower-cost technicians to focus on the less technical jobs---for example, bumper repair.
“There is an opportunity to make more profit on those smaller jobs, which is about 45% of a shop’s business,” he said. “If they can make more money on 45% of their business by using a lower-level and lower-paid technician to do these smaller repairs, that’s where they change their effective labor cost.” Based on an average of 30 hours per RO, he said reducing the effective labor cost by $1 can increase annual profits by $31,200.
Paint Hours per RO
In regard to paint hours, Shoemaker said shops can often miss little things on estimates such as blending a gas filler door when repairing a quarter panel, refinishing a tail lamp pocket when replacing a rear body panel or rocker panel flanges to correct frame clamp damage. He said that currently, the average paint hour per RO is 7.8.
“If we raise that by one to 8.8, over the year you can bring in an annual sales increase of nearly $73,000,” he said.
Paint and Material Sales Per Paint Hour
Shops that increase their paint materials sales per paint hour by $1 can also make a significant difference in their annual profits. When insurance companies cap materials, Shoemaker said it can drive down the actual rate. Using a common industry average of $27.63, he said shops can boost their annual sales by $8,100 by raising their paint and material sales per paint hour by $1.
Paint and Material Cost per Paint Hour
In terms of the amount of paint materials used to do a particular job, Shoemaker often recommends that shops use a little less product. He has found that typically, there is about an ounce of paint left over after finishing the job.
“If you are mixing less product, your cost for that job is going to be reduced even though you are still getting paid the same amount because you are eliminating the waste,” he explained.
He said it’s understandable that painters don’t want to be short on materials and go into the paint booth with less paint than they need to do the job. Therefore, it’s important to take into account work habits, pilferage and waste. Based on a benchmark of $13 to $14, reducing the paint and material cost per paint hour by $1 would increase annual profits by $8,112.
In addition to these six KPIs, Shoemaker said the same concept of “The Power of One” can be applied to a business’s gross profit numbers, including total labor, parts, paint and materials, and total gross profit.
For example, using 62 percent as a benchmark for total labor gross profit, Shoemaker said it would equate to $812,448 in gross profit using $1,310,400 as an average shop’s labor sales.
“Employing ‘The Power of One’ and increasing the percentage by 1 to 63 would increase annual profits by $13,104,” he said.
In terms of parts gross profit, using a benchmark of 25 percent would equate to $270,000 using $1,080,000 as an average for annual part sales. Shoemaker said that by increasing the percentage by 1 to 26 would bring an additional profit of $10,800.
“I call it organic growth,” said Shoemaker. Rather than bringing in more cars to increase a shop’s sales numbers, he said shops can increase profits with the current work they have.
“By looking at the small number rather than the big number, you can very steadily and sensibly grow your business,” he said.
This article was based on a presentation by John Shoemaker, business development manager for BASF Automotive Refinish Coatings. For more information, email john.a.shoemaker@basf.com.
Stacey Phillips Ronak