We have certainly had some economic setbacks recently. The government has finally stated that we are in a recession. DUH! Most of us figured that out a long time ago. Unfortunately, the economists are complaining that the stock market and consumer spending are just not cooperating with this recession. Stocks are doing fine and consumers are spending money. The Fed interest rate is the lowest it has been since the 1960’s.

The BAD news is that 0% financing on cars is hurting the aftermarket transmission business. CNN stated that Autozone (the parts store) is having record sales because in a recession people don’t want to purchase a new car but will fix the old one instead. Hmmm, can’t prove that by rebuilt transmission sales. It appears that the consumer is willing to spend money on the car as long as it isn’t a major repair. If a major repair is needed, they figure they might as well get a new car at 0% interest, 0 down and 0 payments for 12 months.

The GOOD news is that those trade-in cars are out there somewhere with the same problems that made the owner trade them in. The other good news is that historically, a recession lasts for 11.2 months and the government said this one began last March. That means we should be coming out in February or March this year. So, in order to come out strong, we need to get our affairs in order. In the October 2001 issue of GEARS magazine, I talked about the goal of any business is to make money. Now lets see how we start doing that. To achieve any goal, you have to know where you are now. Then we can make a plan to get to where we want to be.

We need to start with a Profit & Loss Statement. A P&L statement for just one-month won’t be very informative. Ideally, you want one covering a full year or at least six months. A P&L is a report card of how you just did and we are going to use it to identify basic trends and problems. If we start with a very simplistic approach, we will use industry standards to see where your shop fits. Every P&L that I look at is slightly different based on how your accountant likes to set it up but here are the general rules: At the top is total sales or revenue. Below that is Cost of Sales or Cost of Goods Sold, this is basically your cost in Parts and Labor. Total Sales minus Cost of Goods Sold equals your Gross Profit margin. You’re looking for 60% gross profit.

Next on the P&L is Operating Expenses. These are things like rent, advertising, shop supplies, admin salaries, phone, utilities, legal, etc. That number should be about 40%. So a Gross Profit of 60% minus Operating Expenses of 40% equals a pre-tax net profit of 20%. In a simplistic world, if your net profit is less than 20% then it simply means that one or more items in your Cost of Sales or Operating Expenses is too high. Identify that item or items and correct it. Before you dismiss that as too easy, think about what 1% could do for you. If you had gross sales of $8000 per week that would be $416,000 per year. 1% of that amount is $4160.00 directly into your pocket. What if you could save 3, 4, 5 or even 10 percent?

Let’s break down the P&L a little further and compare it to industry norms. Start with Cost of Sales. We will break that down into two categories: 1) Parts to gross percentage and 2) Labor to gross percentage. Your accountant may put a lot of things into parts, but for our needs we are looking at actual parts purchases (including Torque Converters) plus fluid, plus cores. We will not include shop supplies, warranty, car rentals, franchise fees, commissions etc. The target you are shooting for is 20% or less. If you do a lot of standards or buy Remans, your number will be higher. We are just looking at industry norms. So what are some general things to look at if your Parts are high? I would start by looking at CB’s, No-Go’s, waste, putting in parts and not selling them, theft and poor purchasing. Remember that every single part being put in that car MUST get sold to the customer, right down to a thrust washer or bushing. For now, just get the numbers and we will worry about what they mean and how to fix them later.

Now let’s look at labor. Labor is production labor and wages as in the technicians that are actually working on the car plus contract services such as flywheel grinding or other machine shop services. Do not include employees like the manager, parts person, janitor, etc. This number should also be 20% or less. How many employees do you really need? A rough rule of thumb is that each production employee should produce $4000-$5000 in sales per week. In other words, three technicians should be able to handle a shop producing $12,000-$15,000 per week in sales. If you are not producing that amount per employee, you should use production logs and other reports to find out why.

Lastly, is Operating Expenses. These are usually fixed costs that we may have very little control over but we should at least see what the norms are. Here they are: