Diagnosing and Fixing Profit Leaks

Up Your Business is an exclusive GEARS Magazine feature in which I share stories, insights, and reflections about real business and life challenges.

In keeping with the diagnostics theme of this issue, I thought it’d be appropriate to share some quick tips for diagnosing and fixing some common profit leaks that many shops are experiencing — some known and some unknown to the owners.

With over 30 years of coaching hundreds of shop owners, I’ve found that there are some key checkpoints for diagnosing profit leaks quickly. Just like mechanical problems, some of the fixes are simple; others are more complicated. Also like mechanical problems, minor problems left unattended can often lead to major problems.

It makes good business sense to give your shop a regularly scheduled performance diagnosis to determine whether you need to perform preventive maintenance, minor repairs, or in some cases, a complete overhaul.

Critical Performance Indicators

Your shop management software system should be gathering data to help you evaluate the Critical Performance Indicators (CPI) for your shop. Hopefully, it’s also capable of producing quick reference reports to monitor how your shop is doing in each of these critical areas. When something appears to be “out of whack,” you can dig deeper to find the cause and correction. Of course, there’s always room for improvement, but first fix the leaks.

Let’s look at some key CPI categories.

Parts Costs and Overhead Parts

Parts cost is a good place to start. I avoided putting too much weight on industry averages or the percentages other shops claimed in this area. They’re good guidelines initially, but the best guideline is how you’re trending against your own shop’s historical data.

Here are some possible causes and things to check if your parts costs are trending in the wrong direction:

• Are you or your employees becoming complacent when purchasing parts? I’m a believer in vendor loyalty, but it can become a leak if you don’t compare competitive vendors’ prices regularly.
• How’s your quality? If your comeback percentage is trending in the wrong direction, your parts costs are sure to follow. If you aren’t tracking comebacks and the actual hard costs associated with them, you shouldn’t let another day pass before you begin doing so. The easiest way to do this is to create a non-revenue repair order with parts and labor costs for all comebacks.
• What about the never-left-the-shop comebacks, or no-goes? These are still comebacks, but many shops that track traditional comebacks fail to track them, and they often consume significant additional parts.
• Misdiagnosing problems can also lead to increases in parts costs. One example is when you perform work that doesn’t fix the customer’s problem. You likely can’t or don’t charge in these cases, but you still used parts. This also results in failing to charge for all the parts that weren’t detected during the diagnosis.
• Perhaps the biggest profit leak is mispricing your work. If you’re charging the same price for a part, regardless of what it costs, it works to your advantage when you pay less, but obviously to your disadvantage when you pay more. Your sale price should adjust as your parts costs change.
• What about your shop labor rate? When was the last time you adjusted it? Why is it at that level? If you’re just matching your competition, how did they decide their rate?

(Feel free to call me for guidance in calculating a shop labor rate.)

Productivity

There’s been a great deal of conversation about the difficulty in finding qualified technicians. This makes it all that much more important to track individual as well as team productivity. Again, be sure to track productivity against historical data to identify trends.

Here are a few leaks and causes for declining productivity:

• Maybe you’ve hired the wrong people, but then again, maybe you just need to invest in training them.
• Lack of effective processes — with no systems, the shop is relying on verbal communication. This is fraught with time delays, inaccuracies, and other efficiency leaks.
• Techs are always waiting for instructions, job assignments, or parts to do the job.
• Sales bottlenecks — delays in getting jobs authorized also delays getting them into the workflow.
• No performance standards — techs don’t know whether they’re doing a good job because they don’t know what a good job is.
• Wrong types of jobs — the techs’ skills don’t match their job assignments, so they struggle with various performance setbacks.
• Comebacks and no-goes — when there’s no tracking, it’s impossible to determine the actual loss of productivity.
• Inadequate staff for your shop’s adjusted capacity — without knowing the proficiency of the techs, you can’t calculate your shop’s capacity, and vice versa.

Sales and Marketing

Everything hinges on having enough of the right kind of jobs in the shop. It all begins with having enough leads for jobs that fit your sweet spot in terms price range, profit targets, technical proficiency, shop capacity, etc.

Here are a few leaks in the area of marketing:

• Are you attracting too many jobs that aren’t in your sweet spot? The funny thing is, most shop owners haven’t taken the time to review their sales history to identify the best types of customers and jobs for their shops and crews to perform at peak performance.
• Marketing and advertising for the wrong types of customers can overwhelm your shop and crew with unprofitable, time-consuming jobs.
• Separate your good customers from the not-so-good ones. One of the best places to find good customers is from your good customers. Set up automated processes to contact your good customers to keep them coming back, but also remind them to refer their friends and relatives to you.

In this age of automated contact systems, there’s no excuse for not tapping into some form of constant communication with your customer database. Just make sure you’re communicating with the good customers.

Selling is the process of converting the leads your marketing system produces into jobs. In a busy shop, a marginal sales person or process can actually let quality leads slip through the cracks undetected, resulting in major costly leaks. The busyness of the shop camouflages the sales leaks.

Use your historical data to diagnose whether any of these sales issues exist:

• Are you being selective with the jobs you take in? You’re always better off doing what you do best and most profitably. A good sales process converts the jobs you want, while filtering out the undesirable jobs.
• When things get a little slow, does your salesperson take in those jobs that end up as what we’ve all come to call “I should have known better” jobs? You know: the ones that end up costing you money in the end.
• Overselling the shop’s capacity leads to all sorts of leaks: careless diagnosis, rushed work leading to mistakes, lost bookings of good jobs due to being too busy with marginal or undesirable jobs to book the good ones on a timely basis. And, when the shop is overwhelmed, it negatively impacts the salesperson’s drive to sell more work.
• Of course, ineffective sales processes or marginal sales skills result in lost leads, lost jobs, and jobs sold at unprofitable prices.
• Underselling the shop’s capacity can result in the work expanding to fill the time, or the “empty restaurant syndrome.” I’m sure you’ve noticed that the less busy a restaurant is, the slower the service seems to be. It can be the same in a shop that doesn’t have enough sales.

Fixing Things 1×1

It seems fitting to include an excerpt from an article I wrote about seven years ago. It has to do with the power of the number 1.

…consider the amazing impact that the number one can make. The number one is pervasive in our everyday conversations, with sayings like, “There’s one for the books”; “One way”; “One more time”; “One of a kind”; “We’re number one”; “My one and only”; “One for the road”; “Bet you can’t eat just one”; and “I think I’ll have just one more.”

But the number one can truly turn your business around in more than one way… excuse the pun. As I’ve skipped in and out of hundreds of shops across the country, I’ve heard many a shop owner say, “If I had just one more major job a week, things would be fine.” I got to thinking: Why not? One more of anything seems doable. What would it take to get just one more job per week, per day, or per whatever you needed?
Are there any alternatives to pursuing one more major job that would yield the same or better bottom line impact? You see, the point is that, just by thinking in terms of the number one, an entirely new way of thinking opens up. Through the power of one, you could make incremental increases in sales and reductions in costs leading to dramatic improvements to your bottom line.

Here are some examples of what I mean.

• What would it mean if you could sell and produce just one more hour of technician time per day? Well, if your shop rate is $75 per hour and you’re open 5 days per week, that’s $19,500 per year in added revenue with no added cost to overhead. Just think what that would mean if you could do that with each of your technicians… $19,500 x (The number of techs in your shop) = $___________!
• If you increased your shop labor rate by just $1 per hour, who would notice besides you? It costs nothing, and if your shop sells and produces 150 hours per week, that’s $7,800 additional to your bottom line.
• What if you had just one more appointment per day? If you’re open 5 days per week, that’s five more appointments per week. If your average sale is $300, that’s $1500 more in sales per week or $78,000 per year!
• Have you ever noticed that the best leads come in first thing in the morning and at the end of the day? What would happen if you opened for business one hour before your competition and stayed open one hour longer than your competition? What if you could do this without increasing your labor cost? Consider this idea… have part of your team start and go home an hour earlier and the rest start and go home an hour later. You’ve just added two more hours to your business day without increasing your labor cost or overhead, and you’ve established a competitive edge over your competition that could result in one or more additional jobs per day.
• The power of one works for saving money, as well. Benjamin Franklin said, “A penny saved is a penny earned.” When you save a penny, it drops 100% straight to the bottom line. So what does a dollar here and a dollar there or just 1% of cost savings mean to you? It simply means every dollar saved drops to the bottom line. If your net profit is 15%, to make $1 of profit, you need to sell and produce nearly $7 of work. Patch cost leaks… they are bottom line boosters.

These are just a few examples of why diagnostic checks are an important part of keeping your business operating at peak performance. Make them a priority for your business.