Many times during the course of a busy day I’ve started to eat lunch or a snack and usually get interrupted. Have you ever taken a couple bites from an apple and have to put it down to take care of something? The problem is that when you come back it has already started to turn brown and just doesn’t look as good as it did. The same thing happens to your labor margin. If you “put it down” or don’t pay attention to it on a constant basis you will find your labor margin going bad and it just doesn’t look the same on your bottom line. A complete understanding of what affects your labor margin and how to hold a 60 percent margin fully loaded with benefits is essential to maintaining a profitable shop.
One of the major things that contribute to a declining labor margin is your payroll as compared to your labor rate. Labor is a commodity that you buy and sell, much like your parts inventory. The major difference is that, like the apple, it goes bad on a constant basis. Labor is perishable, you purchase it for a short period of time and when the time is up, you have to re-buy it. One of the problems is with that big juicy apple, the “A” technician. We know that they don’t “grow on trees” so when that talented tech comes along, we have a hard time not bringing them on board. The only problem is that the big juicy apple comes with a big juicy price and rightfully so, given their skills and talent. But do we need them and can our labor rate support them and still give the shop the profit that it needs to make? Many owners need some help keeping things in line; a good accountant who understands the automotive field or some type of professional coaching. It helps prevent the tunnel vision that occurs when running a busy shop.
We need to look at our labor rate and see if it has the ability to support the staff that we have and still give the shop the return it needs. A Labor Rate Analysis is a simple way to check on your more expensive employees and see if your labor rate can support them. Take your most expensive technician’s flat rate, (or their hourly pay if that is your pay system), then add to their pay for that one-hour the additional costs involved in having the technician there. You have to keep in mind that they cost you more, sometimes much more, than just the basic pay. Take into consideration the FICA, FUTA, SUTA, workers compensation, unemployment insurance, health insurance, vacation time, uniforms etc. Take all these factors and add them to the hourly rate for the one-hour. This gives you the actual cost involved for that big juicy apple. Now, remembering that this labor is something we buy so we must sell it to make a profit, we take the total that we have come up with and multiply it by 2.5 to give us a 60 percent margin on the tech’s labor. The number that you come up with should be at or lower than your current labor rate. If not, then you need to raise your labor rate or you may not be able to afford that apple. Shopping the competition will let us know if we are charging a competitive price for our labor. If we are lower than those around us, we can raise our rate and that may help, but if we have a labor rate at or above the competition and the magic number that we found at the end of the exercise is higher than our current labor rate, guess what – you can’t afford, the big juicy apple that you have!!
Remember, we divided the expenses by the amount of time the techs are standing on the floor. So if they are billing out less hours than they are on the floor, this will increase your actual cost per hour. The majority of shops are making a 60 percent profit on the first hour but by the time they calculate their profits on the 40th hour they are making only a 15 percent profit margin. This is where most owners are getting hurt!
Many of our clients have a labor rate that is higher than the competition and there lot is full of cars. The reason for this is their clients are willing to pay more because they trust them and like the experience visiting their shop. Be very careful attempting this strategy unless you have done a customer satisfaction survey and have scored over a 95 percent CSI rate.
Selling the right mix of Parts vs. Labor will help. Making sure that we have our maintenance items priced properly, giving us a good margin, and making sure that we maximize their sales, will also help.
Another guideline is to make sure you have the right staff for the job. The expensive “A” technician is offset by your lower level technicians who make less but are able to perform the maintenance items. Keeping your less expensive technicians productive will help your labor margin and you are building the bench for the future. Having the right mix of high skill to lower skill level technicians is a huge key maintaining the right 60 percent profit on labor. How do we know if we have the right mix? Too many times owners just go with what they think “feels” right. Instead of guessing, try this exercise. Take all the invoices for a certain time period, the longer the better. Then break them down into piles based on what level of skill was needed to perform the task that the car originally came in for. Then count up the number of labor hours on the invoices. It does not matter if you have an oil change in the “A” tech pile, if it started with a diagnostic then that is the pile it goes in. At the end we should have 4 piles broken down into “A” through “General Service” technicians and we should know how many cars are in each pile and how many hours each level technician is performing. This will give us a good guide on what type of staffing we need compared to what we have.
Remember that the big juicy apple looks good but once the day has started, you have just taken a big bite. Make sure the last bite of the day is as good as the first.
Written by Automotive Training Institute (https://www.autotraining.net/), a valued Repair Shop Websites partner.