Service and Parts Profitability
Gross profit percentages are very important if you want to show a profit in the service and parts departments. You should set your minimum goals to achieve 70 percent for labor and 40 percent for parts. Accessories are normally priced somewhat lower, with a gross profit of approximately 10 percent to 30 percent, depending on what item is sold and what the competitive pricing is.
There are some who would argue you can’t afford to charge yourself retail rates for internal labor and parts. The difference between these gross profit percentages and what I see on some financial statements is normally immaterial to the vehicle gross profit when reviewing the averages for all repair orders.
To compute the labor rate you should charge, take your average labor hourly technician cost, including any incentives for hours or parts sold, and divide it by 30 percent (100 percent less the 70 percent gross profit you want to make) to arrive at the hourly labor rate you should charge yourself or others. For example, if your hourly pay is $15, then divide $15 by 30 percent to arrive at a $50 per hour labor rate. This will allow you to make a 70 percent gross profit on your labor charged.
To compute the parts retail price, you would use the same formula. For example, if your parts cost is $15, then divide $15 by 60 percent (100 percent less the 40 percent gross profit you want to make) to arrive at a $25 retail parts price. This will allow you to make a 40 percent gross profit on your parts sold. Most parts system setups use a markup method rather than a gross profit method. If this is the case, then you should use at least a 67 percent markup to achieve a 40 percent gross profit on your financial statement.
On repairs, you will normally have approximately $1 of labor charged for every $1 of parts sold. If so, you will average 50 percent to 55 percent combined gross profit on labor and parts sales. On maintenance-type work, there will normally be more labor and fewer parts, as you are basically running through a checklist to see what the vehicle needs.
What work should you sublet out? If you have the stalls and qualified technicians available, you want to do as much of the work yourself rather than give another shop the gross profit you would be making on the repair. You should try to maintain a 15 percent gross profit on any sublet labor you sell. This would include towing, tires, glass, etc.
I see many dealers who are subletting out repairs they could complete themselves. If you have the shop space, you should be completing these repairs yourself even if who you are using is cheaper. The reason is you will make some profit even at the cheaper price, which will go straight to the bottom line as profit and utilize unused shop space.
Accounting for all available labor hours versus the flat-rate hours turned will provide you with a technician efficiency report. The technicians should have two timecards. One is for clocking in normally at the start of the day, clocking out/in for lunch and clocking out at the end of the day. This timecard will track the total time the technician is on site. The second timecard is to track the hours charged to each repair order so the labor can be costed out and the hours turned can be charged to the appropriate sales account.
The difference between the total hours and the flat-rate hours generated is called unapplied time. The goal is to keep unapplied time to a minimum. Even though the technician may not be busy all the available hours, any differences should be documented on the repair order timecards so you know what they were doing when they had unapplied time. They could have been cleaning the shop or running for parts. If they are actually working but not on vehicles, then their time should be charged to an appropriate expense account and not unapplied time (a cost of sales account with no matching sale account).
Another tip is to not keep repair orders open for long periods of time. Close out the items you have completed and open a new repair order if you are waiting on parts. If you do so, then your sales and cost of sales will be more accurate each month and your internals will update the cost of your inventory much faster.
There is a great possibility of theft in the parts area. To protect yourself, use purchase orders and let your suppliers know they are required. The purchase orders should have the repair order number on them and also a stock number if you are repairing your own vehicle. A random review on a regular basis of purchase orders and the repair orders they are attached to will hopefully reduce the possibility of theft.
The parts department personnel should be completing mini parts physicals daily. If you take the number of bins you have in the parts department and divide it by the number of working days in the month, you will arrive at the number of bins you should be taking a physical inventory of daily and verifying the physical counts to the parts pad. You would then run the variance report monthly to see any differences you have encountered. By taking the physicals daily and your entire parts inventory monthly, you hopefully will catch problems before they get out of control. Parts shortages cut directly into your gross profits and should be minimized.
If you structure your parts and service departments to accurately track your sales and cost activity with adequate setups of minimum gross profits, you only have to worry about the volume of work you sell. That is up to you.
If anyone would like to receive a spreadsheet to calculate the lost gross profits on internals and the average increase per repair order by charging regular retail rates, please email me and I will send it to you.
Vol. 9, Issue 4