Though handling your shop’s day-to-day accounting operations might not be exactly what you have in mind when you walk into work in the morning, it certainly doesn’t hurt to have a firm understanding of how they work. Many dealers and repair shops try to avoid talking about things like revenue and labor costs but if you have a firm grasp on what they mean and how they affect one another, you’ll be better equipped to boost profits and make more informed financial decisions regarding your business.
If you’re a dealer or repair shop, the amount of money you make on a sale is a product of a number of different things. First and foremost, how much did you pay for the part you are selling? Secondly, what is your markup? And finally, what other costs (finding/picking up parts, freight, overhead, etc.) did you incur along the way to selling the part? If you know these variables, determining your profit is pretty simple.
Unfortunately, for many dealers and repair shops, it’s been a race to the bottom with regards to profit margins when selling OEM parts, but it doesn’t have to be. For instance, say your competition is selling a part but at a lower price than you’re selling it for. You might think you need to drop your price in order to make the sale and stay competitive, but you don’t. In fact, you can double or triple your profit margin and sell the part for the same amount or even less than your competition. Most dealers think this means that you have to offer a more attractive warranty and while something like that may in fact help drive sales, there is a much easier way to get an edge over your competitors without taking a hit.
Higher profits don’t always mean higher prices. Take an oil pump for example. When one of your customers needs this part you probably order one from the original manufacturer, add your rather low 10 percent markup and turnaround to sell it. Hopefully you already know it, but if you don’t, you lost money on the sale of the part! In addition, you offer no competitive value over other vendors and in the event that the part does fail, the OEM will likely deny the warranty for one of many reasons that you have no control over. Sound familiar?
Now, picture a different scenario. Your customer calls and instead of ordering the pump from the OEM, you rebuild it yourself and charge for the labor and markup the repair parts. Because rebuild kits are so inexpensive, you’ll have enough room in terms of price to markup every hour of labor that you spend working on the pump. You’ll even be able to markup the cost of any extra parts you have to order. When the job is done, you’ll have a perfectly good oil pump that cost you a total of 35 to 50 percent of what you would have spent had you purchased the part directly from the OEM.