February 16, 2015
6 Important Steps to Increased Profits
Let's say you decided to invest a significant amount of cash with the goal to improve your shop’s operations profit. Maybe you invest in physical improvements to your waiting room. And then you invest even more on promoting these new upgrades to your customers. Finally, let's suppose that your plan actually worked, and a measurable increase in car count occurs. Goal accomplished? Not so fast!
Now let's say that your customers have come to see your newly acquired and promoted waiting room – but your employees choose not to maintain it! With all those newly motivated customers waiting and watching, anticipating the benefits of the new improvements – only, the people who can really make your investment pay off – your employees - simply choose not to put the new improvements into action. Right about now you're likely saying, “This would never happen in any serious business that is seriously interested in making a profit!”
Well, try telling that to Denver Broncos fans. Their team invested how many millions in Peyton Manning? And then with a chance to advance to the next round in the playoffs, with millions in ticket sales and concessions at stake, and with 17 seconds left on the clock in regulation play, they chose to let the time expire and go into overtime. They actually chose not to utilize the asset they invested in - Peyton Manning - to get them down the field with a short clock. The very reason they acquired him, and the chance to improve sales and profits, was gone when the game was eventually lost.
By now you're asking, “So what the heck does a poor choice by a mega million-dollar NFL team have to do with improving profits at my repair shop?”
Same Lesson, Different Playing Field
How many times a day, on a smaller scale, is the very same kind of choice made in repair shops? Here is just one example of feedback from one consumer who visited one of our repair shop customers:
“I saw your ad about updated, more comfortable waiting rooms, which is one reason I stopped coming to you a few months back, so I thought I'd give you another try. Everything was new, and you had obviously spent a lot of money, but the place was absolutely filthy! I opted to wait outside! This time I won't be back!”
There is a big difference in making an investment in your operation and then turning that investment into profit. In this case the operator made the investment, but didn't make sure the customer enjoyed the result, similar to what the Broncos management did. So the key question to ask yourself is: ‘How do I help improve the chances that my investments in the business actually result in increased profit?’
6 Important Steps to Increased Profits
1. Make Certain You’re Shooting at the Right Target
Too often when shop owners ask the question, “How do I increase profits?” - they hear things like, “Know what your customers want,” “Expand your service offerings,” “Utilize direct mail more effectively,” which are all nice responses, but they are answers to an entirely different question. Those are all answers to improving sales, which may fall to the bottom line as improved profit, but as illustrated, there are a variety of obstacles preventing reinvestment dollars from becoming improved profits.
If you’re only shooting at the sales target, the goal to increase profit will likely fall short!
2. Define "Profit"
I can't prove it, but I would bet that there are relatively few owners or services managers across the auto repair industry who can provide an accurate answer to the question, “Can you give me the definition of profit?” Maybe I'm wrong, but ask yourself or your service manager if you can simply state the definition of profit. With computers doing all of the calculating and spitting out all of the operational results, it's more than likely that too few of us can. The definition you're looking for is:
sales (revenue) – (minus) expenses = net income (profit)
If you or your service manager can't accurately define “profit,” it's almost certain you will not be able to achieve the profit objectives that match your expectations.
3. Define "Profit Margin"
Now ask yourself or your service manager if you can define “profit margin.” You will probably get the same definition for the word “profit.” You should want your manager to understand that “profit margin” is measured in percent, while “profit” is measured in dollars and cents:
net income ÷ total sales = profit margin
The difference is important because you now have another tool that can help your control profit results. How? Let's see...
4. Knowing “Profit” vs. “Profit Margin”
The reason it’s important to distinguish “profit” and "profit margin” is that profit margin is a gauge of your operation's control on operating costs. Assume that in the previous year your repair shop’s sales were $700,000 and the resulting profit margin was 20%. Now assume in the current year that your shop improves its sales to $800,000 annually; but for that sales increase, you advertised more, used more labor, and upgraded your waiting room. Suppose these additional expenses increased the operation’s overall operating cost to $700,000 annually. Looking at these figures, the operation still has a profit of $100,000 (revenue minus expenses) but its profit margin has shrunk from 20% down to 12.5% ($100,000/$700,000 = 12.5%).
5. Why Knowing the Difference Is Important
It is critical to understand your shop’s "profit margin" because increased revenue does not always lead to increased profitability. When you know your shop’s profit margin, it simply places you in a much better position to control line item costs and make more cost effective sales plans to increase revenue.
6. Take Control of Every Line Item in Your P&L Statement
In order for steps 1-5 to have the desired effect, this final step is essential. Knowing you or your service manager have control over every line item on the P&L statement, from sales to line item expenses to bottom line profits will put you in a position of control and accountability. You’ll have more levers to pull to make your business successful. If you are unaware or your service manager is prevented from knowing this critical information, neither of you will have the ability to positively influence results.
Some Questions to Think About
Let's begin where we started, by revisiting the decision to make a significant investment in upgrading a waiting room, with the goal to improve your shop’sprofit margin. Here are some questions to ask yourself:
1. Would I feel more confident about this decision if my service manager or I knew and understood these 6 steps to increasing profits?
2. With a new understanding of profit and profit margins, will we be more confident that we can see that our investment is protected and maintained?
3. Would we feel more secure that the very waiting room we’ve invested in was prepared and correctly maintained, at all of the critical moments, for every customer that comes in to enjoy the new surroundings?
4. Would we be more confident that our investment would generate repeat business and increased revenue with a better chance that a larger percent of those sales would be converted to profit?
5. Finally, with our newly acquired understanding of profit and profit margin, would Denver Bronco fans rather it had been us making the play calls in the final 17 seconds of their last game? I think maybe the Bronco's owner would, but that's just me.
Paul Haloulos is the trade marketing manager at Castrol USA. For more information on this story or Castrol products, call 1 (888)-CASTROL or send an email to firstname.lastname@example.org.
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