10 Metrics Proven to Boost Diesel Engine Repair Shop Profitability
It's always good to make more money, right? But sometimes it's hard to identify strategies for making that goal into reality. Our new blog series, the RSVP Profit Boosting Boot Camp, aims to help you pinpoint metrics that can help your shop really grow. Don't just wish you could increase your profits, learn how to make it happen!
Why tracking metrics is vital to the success of your repair shop
HHP conducted a nationwide survey and found that the biggest concern amongst shop owners for 2018 is bottom line profitability. Yet with the increase in costs for parts and overhead and the shortage of technicians, many repair shops find themselves not knowing how to give their profits that bump up.
One often overlooked strategy is tracking KPI's (key performance indicators) and other measurables to help determine areas for improvement. In their June issue, Ratchet+Wrench detailed the results of a study they conducted about KPI tracking. A large majority of shop owners who responded claim to routinely track KPI's, and many of them described how these measurements were vital in the overall health of their bottom line. Even more than that, the numbers they published show that shops who tracked and responded to KPI's outperformed those shops that did not.
More than anything, tracking your shop's KPI's and other important metrics will give you a better idea of what your shop is doing right and where money is being lost. It takes the guesswork out of figuring out what is draining your profits. HHP also released a white paper discussing ways to maximize your profits. Visit our previous post to download a copy.
Metrics You Should be Tracking
Okay, so you want to start tracking your metrics. But what should you look for and how does that help you make decisions about the future of your shop? That's what this series will cover, spending time going into depth about each of the following topics:
The closing ratio is the percentage of items from a quote that were actually sold at a given transaction. A higher percentage should indicate higher profits. The danger lies, though, at not questioning why your closing ratio might be high. An estimate that quotes only work the customer requested might have a 100% closing ratio, but the opportunity was lost to sell the client additional work.
Average Order Value
The average order value can be calculated by dividing the total revenue by the number of orders. The resulting figure is how much customers spend on average. This number, too, can be increased by upselling or pointing out additional repairs, but it has its limitations as well.
Overall Gross Profit Margin
Your overall gross profit margin is the revenue minus the cost of goods sold (this does not include operating expenses) all divided by the total revenue. This number helps to measure a shop's success at generating revenue from the cost of parts and labor.
Gross Profit Margin on Parts
This is calculated in a similar way to the overall gross profit margin, but focuses specifically on the revenue generated from parts after the cost has been subtracted. There are some ways to increase this revenue, including increasing markups. This might be the most obvious solution, but it also runs the risk of driving away customers if the prices rise too much. In many cases, another solution might serve your shop better.
Gross Profit Margin on Labor
Again, this is figured similarly to the previous two topics, with the labor cost being subtracted from the labor revenue and then divided by the labor revenue. This number zeroes in on the effect of labor costs to your shop's revenue.
Net Profit Margin
The net profit margin is the revenue minus all costs (goods sold, operating costs, taxes, interest, etc.) divided by the total revenue. Watching trends in net profit can allow a company to better track which practices are working well for them and address those that aren't.
Posted Labor Rate
This number is how much a shop charges for labor. Public perception is that labor rates are too high, but in reality, they are often low, hurting the shop's bottom line.
Effective Labor Rate
This is calculated by dividing the total labor sales by the total labor hours. Raising efficiency is one method to help the effective labor rate, as is re-evaluating the way hours are billed to the customer to ensure accurate estimates.
This is best measured by dividing the hours worked by the hours available. This allows you to better evaluate down-time and the amount of work that is actually available for your technicians.
This can be tracked by dividing the hours sold to the customer by the number of hours it actually takes your technician to do the job. A number greater than 1 is ideal, but it's important not to make speed your only goal.
As previously mentioned, the following posts in this series will discuss each of these points in greater detail, showing you how to interpret them and implement them in your decision making process. Stay tuned!
As always, for additional content and other great perks, including exclusive pricing, lines of credit, and waived core charges, be sure to join our Repair Shop Value Program! Click here for more information and to join the program.