Overhead costs are the expenses associated with running your diesel repair shop that are not directly attributed to a sale or a repair order, such as rent, insurance, utilities, office staff, etc. Overhead is identified on your Profit & Loss statement as a summary of these expenses. The cost of overhead should be no more than 10% of your sales. Any increase in overhead expenses takes away from your profits, unless your sales increase as well.
There are several overhead items in every business. Some believe that not much can be done to reduce overhead, but it can. Every line of overhead on your P&L is usually someone else’s sale, which means they are controllable or negotiable. Review each cost carefully to see what can be done to reduce them. Even small adjustments can contribute substantially to making your repair shop more profitable.
In most businesses, there are two types of overhead costs: fixed; and variable. Fixed costs usually don’t fluctuate each period. Variable costs increase and decrease, due to changes in business activity. Here are some tips to help you identify and control overhead costs:
• Diesel repair shop business costs can be classified as direct costs or indirect costs. Direct costs relate specifically to the repair process and are trackable and measurable. Parts and labor are considered direct costs. Expendable supplies used for repairs can also be considered direct costs, but tracking them is not usually practical or feasible, so they are usually treated as indirect costs. Rent and utilities are classified as indirect costs, and are considered overhead expenses.
• Fixed overhead costs are the same each and every accounting period. Rent, equipment leases, insurance, and office staff are examples of fixed overhead costs.
• Fixed overhead costs can change over time. Try to estimate future cost increases in those items, and plan and budget your business accordingly.
• Variable overhead costs change with business activity, such as an increase in sales volume. For instance, if your volume increases, then your electricity usage will increase as well. If you offer performance bonuses to your technicians, based on volume, then those costs are also variable. The increase in volume may also cause an increase in shop supply usage.
• Project variable overhead costs based on anticipated sales growth. Increasing sales is always your objective. So consider the associated variable overhead costs when planning your sales growth strategy. But most likely, the overhead will be a much smaller percentage than the increase in sales revenue.
• If you project an increase in sales volume, and you’re concerned about being short-staffed, don’t assume you need to start hiring more repair technicians. That could only compound your overhead problem. Instead, consider whether improvements in your processes or technology upgrades would make your shop more efficient, allowing you to handle the increase in volume with your current staff.
It is important to never be complacent in any area of your diesel repair shop business. Don’t get so caught up in the problems of the daily operations that they distract you from focusing on the aspects of your business that can make a positive impact on your revenue and profits. Take some time every day to look at the big picture and you will start to see your bottom line improve.
To learn more about how to increase your profits, CLICK HERE to download our FREE White Paper: How to Maximize Your Diesel Repair Shop Profits.