Increasing Shop Profitability Series (Part IV): Determining service department’s share of applied hard cost of doing business
Fourth article in a series
By Jim Yount
The first step in turning the service department into a stand-alone profit center is to understand the department’s responsibility for paying its fair share of total company operating expenses. The department will no longer have a free ride. We label these expenses as hard cost. Examples of hard cost include rent/lease, electricity, telephone, maintenance, heating, cooling, taxes and insurance. In addition to obvious expenses, the department must consider what it cost to properly equip and provide special tooling required to operate efficiently (e.g. work stations, benches, lifts, grinders, air compressors and cleaning station).
We would never establish a selling price for a piece of equipment without first knowing its cost. Why would we establish an hourly labor rate without first determining the cost to provide technical service to the customer?
We have provided a rather simple formula to assist with identifying the department’s share of operating expenses. Following the step-by-step formula, you will be asked to identify certain costs and then transfer the numbers to the spaces provided. These numbers will be used to calculate ratios and other values. Numbers provide meaningful information required for establishing a fair market hourly shop labor rate. Your shop’s hourly labor rate must be fair market value. The hourly labor rate must generate equitable profits for the company. Beginning now, with a profit-centered mindset, we’ll show you how to develop a fair and equitable hourly labor rate for your service department.
For the purpose of this mathematical exercise, we will use our copy of a dealer’s Schedule of Operating Expenses — Model, typical of a dealer with annual sales of $1.5 million. These ratios would change very little for dealers with annual sales of $5 million or $6 million.
You’ll need to retrieve a copy of last year’s balance sheet and income statement. Take two or three minutes to review your statement. Using your last year’s statement as a reference, we will begin with numbers from our model of operating expenses.
Step 1
Enter last year’s operating expenses (from our model):
$452,050
Step 2
Enter last year’s cost of maintaining your staff of employees, including the owner(s).
Wages:
$205,200
Mandatory benefits:
$23,500
Company-paid benefits:
$10,900
Total wages and benefits:
$239,600
Step 3
To determine the hard cost of operating the business, subtract total wages and benefits from last year’s operating expenses. This number represents the hard cost of all other expenses not related to maintaining a staff of employees.
$212,450
Step 4
The service department is responsible for its share of the above hard cost. To determine the department share, you must first assign a percent of the total square footage of the business facility.
Total number of square feet occupied by the business (may include more than one building):
5,000 sq. ft.
Determine square feet occupied by the service department. Consider shop work stations, benches and equipment, cleaning station, warehousing of equipment waiting to be serviced and/or ready for customer pickup.
1,500 sq. ft.
Determine the percent of square feet occupied by the service department.
30 percent
Step 5
Transfer from Step 3, the hard cost of all other expenses (payroll is not included).
$212,450
Transfer from Step 4, the percent of square feet occupied by the service department.
30 percent
To determine the department’s share of hard cost, multiply hard cost of all other expenses, by the percentage of square feet occupied by the service department.
$63,735
Step 6 (Has two parts)
Part 1: At today’ prices, how much would it cost, including installation, to properly equip your service department and organize it for the purpose of maximizing billing efficiency?
Your store may not be competitive with the price-driven big-box store. However, a superior service department can put you in first place with customers who want more than a product in a box at a cheap price.
There is a certain group of customers, upper-middle income and above, who are more than willing to pay for superior service. In fact, they want more personal service and expect to pay more. It’s their hassle-free lifestyle they enjoy. It’s part of their culture.
Remember: A first-class service department is your competitive edge against the big-box stores.
We offer the following suggestions to improve service department working conditions. The list should not be considered all inclusive.
Creature comforts for technicians:
Cooling for summer months — portable:
$6,000
Exhaust gases removal:
$1,000
Heating for winter months:
$3,000
Lighting for better vision:
$3,000
Restroom — clean sanitation facility:
$2,000
Uniforms for professional appearance:
monthly rental fee
Waste removal for a cleaner shop:
monthly fee
Get your technicians off the floor. Make allowances for jacks, hoists, lifts, etc.
Cost Part 1 (Creature comforts):
$15,000
Part 2: Equipment
* Replacement cost
* Estimated costs were generated by hundreds of dealers attending workshops.
Work stations [No. of stations (3) x cost ($3,000 each]:
$9,000
Benches:
$500
Air compressor:
$3,000
1,000-pound lifts:
$1,000
5,000-pound lifts:
$7,500
Hydraulic presses:
$400
Grinders:
$200
Cleaning, wash rack — EPA approved:
$10,000
Hand tools:
$10,000
Specialty tools:
$1,000
Testing equipment/tools:
$2,000
Be sure to develop YOUR list of equipment and tools.
Cost Part 2: Equipment, including installation.
$44,600
TOTAL COST for Part 1 and Part 2:
$59,600
It seems to me too many folks, who sell and service gasoline- and diesel-engine-driven equipment, say to themselves and others, “We are in a dirty, greasy business.” That’s true, if we create a dirty and greasy environment. This statement may be said of folks selling equipment to farmers, landscapers, lawncare crews, marine goods, rental companies, etc.
Because we sell and service equipment that is used in a not-so-clean environment, I feel it is important to develop a mental picture. Lawnmower blades cause grass, leaves, limbs, shavings, saw dust, dirt, gravel, when mixed with the grease and oil used to keep the equipment healthy, to create a dirty environment.
The action of drive chains, saw chain, wheels and tires, belts and blades, to force this concoction around spindles and bolts, turns and crevices, between cylinder cooling fins and radiators, clutches and brakes, hydraulic pumps and controls, plus air filters, fuel and ignition systems, simply means the equipment must first visit the wash pit. A good cleaning station keeps most of the dirt and grime out of the service area.
Yes, the customer should pay for this added service. If technicians punch in on work orders, as they should, the cost of cleaning is included in the overall time billed when the tech punches out. This action increases billing hours and shop efficiency. When customers pick up their spotless equipment, seldom do they challenge the cost.
I have witnessed this first hand. I watched a customer come in and pay for the service on his riding lawn mower. The salesperson asked the customer to pull his trailer to the side entrance. When the technician drove the tractor out of the service department and aligned it with the trailer for loading, the customer said, “That’s not my tractor.” The technician, with repair ticket in hand, asked the gentleman, “Are you Mr. (Smith)?” He answered, “Yes.” The tech asked, “Does this not look like your lawn tractor?” The customer answered, “No, my tractor was not this clean and shiny.” What was it that impacted this customer? The answer. After completing the service, the technician wiped the seat with a cleaner, as well as wiped the tires, making them black and shiny.
This technician made a great impression on a customer, who is likely to return.
A major concern: When it comes to hiring better employees is, how do we compete with other industries and other dealerships, which can offer better wages and benefits, plus the advantages of a clean and pleasant working environment?
I believe it’s time to upgrade the way employees and customers see us. And change begins with how we manage our business. Without exception, our business is an extension of how we think. If you do not like what you see, it’s possible to begin making changes today.
Always be tuned into the fact, it takes more profit dollars to provide a better working and shopping environment.
That’s why it is vital your business (service department included) returns exceptional profits to you. Average profits will not pay the bills. Average profits will not allow you to build and operate an exceptional company.
Average profits are no longer acceptable for your business. Average profits seldom pay all bills.
In today’s human resources environment, the relationship between a company and its employees is determined by working conditions. Better wages and benefits are important, but they’re not everything. To keep good and loyal employees on the job for years, it’s necessary to provide clean, comfortable and pleasant working conditions. It’s important for the company to have a good image in the community.
Having the lowest-price product or service is not the ultimate weapon in the sale.
It is important to note creature comfort and related cost is considered a standard working environment. The shop is also part of the overall shopping experience. If customers like what they see, and have a good experience, they will return. Another advantage: Technicians working in a comfortable environment will feel less fatigue, and billing efficiencies tend to improve. Technicians are also less likely to seek other employment.
Step 7
To determine the annual applied hard cost of equipment and installation, we must assign a depreciation or replacement time frame in number of years, usually 5 or 7 years.
Assigned number of years (ask your CPA). We will use 5 years.
To determine the annual cost for equipping the shop, divide total cost Part 1 and Part 2 by the number of years.
Math: Enter into your calculator the total cost Part 1 and Part 2 ($59,600), and divide by the number of years assigned for depreciation (5).
Annual cost for equipping the shop:
$11,920
Transfer from Step 5 the department’s share of applied hard cost:
$63,735
To determine the department’s share of applied hard cost, add the numbers of the two above costs identified in Step 7:
$75,655
Now you know what it’s costing your company for the service department’s free ride.
After determining the service department’s share of applied hard cost, the next step is to conduct a cost impact analysis when we add the cost of three technicians. Calculating cost impact analysis in Steps 8-12 will guide you through the process of determining a fair market hourly labor rate.
Step 8
Transfer from Step 7 the department’s share of applied hard cost:
$75,655
Step 9
Enter your shop’s current hourly labor rate:
$70
At current hourly labor rate, how many hours must be billed to customers to pay the service department’s share of applied hard cost?
1,080 hours
Math: Enter into your calculator the department’s applied hard cost and divide by the hourly labor rate. Numbers of hours will be revealed.
Quick study questions:
Can one technician working full time produce revenue sufficient to pay a shop’s share of applied hard cost? (Yes or No)
__Yes__
If not, how many technicians would it require?
________
In article five in this series, we will share formulas and charts for measuring technician efficiencies and determining how to establish a fair market hourly labor rate. As always, the numbers will reveal the truth and show us the path.
Jim Yount is the founder and chief executive officer of Jim Yount Success Dynamics LLC. For more than 30 years, he has hired, trained, managed, sold, marketed, and motivated. Extensive real-world experience in retailing, distribution and working with manufacturers, both domestic and international, has earned Jim the reputation as a trustworthy and knowledgeable professional in his field. As a results-oriented speaker, he is dedicated to inspiring groups of 30 to 3,000 to develop their talents and realize their full potential. As a business consultant, teacher and coach, Jim is experienced at challenging leaders to explore their operational procedures and change unacceptable practices that are producing poor results. For more information, contact Jim at jimyount@hughes.net or (903) 796-3094 or visit his website at www.jimyountsuccessdynamics.com.
