Investigating Your Net Profit Margin
Understanding your net profit margin can be key to understanding your shop's profitability and what you can do to improve it. We've spent some time going through your gross profit margin in our previous post, and your net profit margin is closely related. This metric is vital to future planning for your shop's profitability.
Your shop's net profit margin tells you exactly how profitable you are after all expenses of operating your business are subtracted. By tracking your net profit margin, not only can you ensure that you're not operating on a loss, but you can better project how your future profits might lay out. You can track trends from month to month, and even year to year to get a clearer idea of exactly what is happening to your money, and if you know that, you can make changes accordingly. All in all, knowledge is the key to boosting your shop's profitability.
To calculate, subtract the total costs (goods sold, operating costs, taxes, interest, etc.) from the total revenue and then divide by the total revenue:
You might have noticed that the last few posts all have similar themes—your profit margins. So why do you need to track another one?
It's true that each of the profit margins have similarities, but each of them is a piece of the larger whole that is your shop's finances. The net profit margin helps capture this whole. Unlike the gross profit margin, the net profit margin does include overhead costs, which can sometimes be forgotten when figuring pricing. Tracking your net profit margin forces you to evaluate how your overhead costs are impacting your bottom line, rather than allowing a great gross profit margin lead you to falsely believe that your shop is in the green.
Improving Your Net Profit Margin
Like with the gross profit margins we discussed in previous posts, working to improve your net profit margin will directly impact your bottom line. Here are some things to think through as you decide on a course to improve yours.
The Actual Cost of Running a Business
In 2014, Ratchet+Wrench published an interview with a shop owner whose repair shop has been profitable all 33 years it's been open. In this interview, he stated that the most important thing to know about your business is how much it actually costs to stay open and operating every day. Every other number depends on that. According to the article, there is no other way to run a profitable shop without knowing that number.
Once you know your costs, you can easily tell if you're actually making enough money to keep your doors open—and make plans to fix it if you're not. From this base, you can evaluate which areas are costing you the most and take steps to decrease those numbers. This is helpful even if you are profitable. Who doesn't want to cut costs and make more money?
Building Strong Customer Loyalty
That same article also emphasizes the importance of customer relationships. Treating your customers like the valued asset they are is what helps keep them coming back to your shop—and often word-of-mouth is the best marketing your shop can do. And it doesn't cost you anything.
Think about your customer retention rates. If they're lower than you would like them, think about why that might be. Would more thorough estimates help? A more inviting waiting area? Work on building those solid, trusting relationships, and the customers will keep coming back, helping your net profit when they do.
Evaluate Your Marketing Strategy
Marketing can cost your business money, so make sure that yours is actually effective. An article from Small Business Chronicle finds that in many cases, by reducing outside marketing and focusing instead on your customers you can cut costs without losing business. It's important to maintain some marketing presence, but taking a look at what you're currently spending vs. what it's actually bringing in might lead you to note that you're marketing is costing you more than the business it generates. In that case, it's probably time to switch up your strategies. To learn more about finding the right marketing path for your shop, check out our past blog, Selecting the Best Marketing Channels for Your Diesel Repair Shop.
Reduce Overhead Costs
Your overhead costs, or those expenses not directly associated with a repair sale, can take a large chunk out of your profits, especially if you're not careful. While some might believe that not much can be done to reduce overhead costs—it costs what it costs—that's not necessarily true. Even small adjustments can make a big impact on your overall profit. Review each cost and see if there is a way to reduce it.
Similarly, it's important to consider the growing overhead costs when growing your business. Yes, your overall goal is to increase sales and profitability, but oftentimes with those increases, there also comes a rise in your overhead costs. For example, if your sales volume increases, it's likely that your electricity usage will rise as well. This will be an added expense to consider as you work to increase sales. Planning for and managing those expenses can help you maintain or improve your net profit margin.
Why the Other Pieces Are Important
So if the net profit margin tells you a lot about the profitability of your repair shop, you might be wondering why it's important that you continue to track the other metrics as well. Without looking at your gross profit margins, you're not getting the whole picture. By breaking it down, you can see how the individual parts make up your total profit. Is more money coming into your shop because of parts or labor? How much impact do your overhead costs have on the profits?
If you don't track all these metrics, you won't really be able to answer these questions and it will be harder for you to make a plan that targets how your shop is going to make more money. But, by monitoring all these profit margins, you have that information readily available to you, helping you to pinpoint the best strategies for your business.
Coming up next in the series, we'll take a look at posted labor rate and how it can help raise your profits.
Give your bottom line a boost by joining our Repair Shop Value Program. You can find more details and sign up here.