It Makes No Sense To Ignore the Percents
What a great feeling it is to have the highest topline sales year we’ve ever had! The success should make us reflect to acknowledge what got us here. Being fully staffed, training for service advisors that got around customers’ “No’s,” cutting discounts in half, and other tactics are some of what made this happen. Of course, we didn’t start the year without a goal in place, but we made the all-too-common mistake of making that goal in dollar amounts without thinking of a percentage increase. The problem is, if you don’t set budgets (or other key business goals) in percentages, you may trick yourself into thinking you set goals high enough and misinterpret your tee ball whiff as a World Series grand slam.
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Dollars Versus Percentages
Most businesses try to achieve eight to ten percent top-line sales increases year-over-year. Then they take that percentage, break it down into dollars, and set month-to-month or week-to-week budgets. If you performed this process starting with a dollar amount increase, you might not be as aggressive as you thought. An annual $100,000 increase in a million-dollar revenue shop works out to 10%, but only 5% in a 2 million dollar shop. We’re in times where the initial hit of Covid is in the past, and now we’ve seen how much demand there is for service repairs and the employees it takes to perform those services, which led many auto repair shops to have increases of 20% or higher by putting best practices in place.
The Strategy of Percentages
The trick behind percentage success is that it keeps everything proportional. When looking at ARO, for example, regardless if you had 10 cars for the week or 100, ARO lets you know how you did with the car count you did have. But wait — ARO is a dollar amount. You’re right, but what compliments ARO? A conversion rate will let us know how successful we were with what potential sales customers could have purchased (estimated dollars) compared to what they bought. Another proportional KPI? Alignments sold compared to car count. You can shoot for 5 alignments a week to help pay off the new alignment machine we just bought, but is 5 too high or too low? Proportionally you would want 1 alignment per 4 cars or 25%. If you’re seeing 100 cars a week, that equals 25 alignments. Good thing we have a percentage to take us to the promised land.
Use Percentages to Measure Success
Percentages determine the success of a business regardless of being in the automotive industry or not. A percentage increase in top-line sales, with good percentage margins on part and labor, gives us a Gross Profit Margin percentage. Now we can use the dollars from the percentage to pay our fixed costs and end with a great NOP (Net Operating Profit). Ideally, you want NOP to be around 24% or, simply put, hold onto 24 cents for each 1 dollar of sales that you take in. By applying these percentages, you can determine where to land your monthly budgets (an increase vs. same month last year, of course), know what the costs of our COGS are that would determine where our GPM lands, and from there onto our NOP. We have to have enough top-line sales to reduce the week-in, week-out percentage that our fixed costs consume. To establish what top lines sales we need, determine what fixed cost rate you’re trying to outrun (usually less than 20 percent).
Use Percentages to Incentivize Staff
How can we use percentages to help our staff? If we’re implementing a new compensation plan for service advisors, it’s in our best interest to tie their wages to an increasing pay scale based on Gross Profit Margin. If they want to make more, they have to sell the right mix of parts and labor and use the appropriate matrices, which all equates to landing at the profit margins we need. The more the shop makes, the more they make. Unfortunately, we can’t set up this pay scale in an easy to interpret way without percentages dictating where GPM should land.
At the end of the day, if we’re operating on budgets, goals, and perhaps methods used 25 years ago to determine how we operate, let’s make it a fair and profitable playing field by deducing these items into percentages and them pursuing them that way.
Non-ATI Members: For more tips on how to effectively increase your profits and grow your business, check out our shop owner events at www.atievent.com.