LAS VEGAS (Dec. 4, 2002)— Norman Gaither was hammering home his warning: Boosting bottom-line profits is critical to a tire store's survival. And too bad if, along the way, a few commonly held assumptions get toppled.
The audience had been lured to the Nov. 5 International Tire Expo “Tires at Two” seminar by the promise that they'd walk away with strategies on how to avoid price wars, hike profits with fewer sales and tweak payrolls that improve the bottom line.
Mr. Gaither, head of Norman Gaither & Associates, was a regional controller of Servomation Inc. and vice president and general manager of Chesapeake Rim & Wheel, before becoming a consultant and business broker in 1984. For some 10 years, he has delivered seminars for the Specialty Equipment Market Association's “SEMA University.”
Following are highlights from the Virginia Beach, Va.-based consultant's primer (some might prefer refresher course) on ensuring healthy cash flow.
It's an oft-used phrase in business circles. But what is meant by the “bottom line?” It's net profit—what you're left with after the cost of sales and expenses are subtracted from sales and gross profit. Here's the pecking order on an income statement:
2. Cost of sales
3. Gross profit
5. Net profit
Dealers must never let bottom-line profits fall below 5 percent, pre-tax, Mr. Gaither advised. As anyone who's ever taken a business class knows, he said there are only three ways to improve profits: increase sales, increase gross profit or decrease expenses. (Remember, gross profit is what you have left after you subtract cost of sales from sales.)
You can come up with a marketing plan to increase sales, but higher sales with less gross profit can actually lead to less bottom-line profit, he warned.
Increasing gross profit is tough in today's competitive market. But even a 1-percent increase in gross profit has a powerful effect on net profit, whether you have one store or 10, he noted.
The most important step in keeping track of gross profit is to take a physical inventory at least once (and preferably twice) a year.
“You're almost inviting people to help themselves to your inventory” if you don't do an inventory regularly, Mr. Gaither said. “I hate to say it, but that's the society we live in.”
Losses don't have to be outright theft, but can stem from careless acceptance of deliveries without checking to make sure every item has been received. Or take the seemingly minute pilferage of a single postage stamp. If a tire shop owner sticks to Mr. Gaither's 5 percent net profit maxim, the store must generate $7.40 in sales to make up for that 37-cent loss. A $100 parts shortage will require $2,000 in additional sales.
Doing the math
Mark-up of costs doesn't yield an identical increase in gross profit, Mr. Gaither said.
Do the math. But consider this example: If your cost on a tire is $46.92 and you mark it up 40 percent, your gross profit is $18.77. That's a gross profit of only 28.5 percent.
(As most business people know, a quicker way to come up with the price needed to earn, say, a 40-percent gross profit is to divide the cost by .60, he said.)
To increase gross profit, you either have to buy it for less or sell it for more. One area ripe with potential, Mr. Gaither said, is to make sure you're charging enough for your service.
“If you do good work and you take care of your customers, you ought to be charging more than your competition,” he asserted.
The turnaround ex-pert told his audience that he typically finds communication problems between the owner and the shop manager. The owner—who used to stay on top of things but now has someone else looking after the day-to-day operations—will attest that the shop's labor rate is appropriate.
But out on the shop floor, the owner can be in for a rude awakening.
“The competition is higher.” Or, “Their building is prettier,'' are common excuses Mr. Gaither said he often hears when people start “squirming” and disclose that their hourly rates are $15 less than the competition.
After the business owner gets over the fear of asking for the “right price,” the dealership just might have to rein itself in. “Once they taste the honey, they want to raise it another $15 next year,” the consultant explained.
Managers must be aggressive in cutting expenses, Mr. Gaither said, providing the following example:
A 2-percent reduction in expenses can be dramatic, to say the least. Consider two companies that have identical sales of $600,000 and costs of $390,000. But one has expenses of $192,000 (32 percent) while the other has expenses of $180,000 (30 percent).
Mr. Gaither said the net profit of the latter is $30,000—or nearly 67 percent more than the company carrying a larger expense load.
Death by payroll
Payroll is ''the killer of companies,'' said Mr. Gaither, who has consulted with tire shops since 1984.
“Everyone expects a raise every year. But when sales and gross profits are flat, you'd better be sure your payroll is too,” he said. Payroll is the first area he attacks when taking on a new client. “When gross profits go down, payroll has to come down or you'll lose money.”
To underscore his point, Mr. Gaither cited $6,000 in excess pay issued to a worker who isn't doing his or her job. You would need sales of $120,000 to cover this expense and make 5 percent net, before taxes, he said.
And don't think for a minute that your own paycheck is above reproach. “You need to start with your salary first. You need to be paying yourself what's reasonable,” Mr. Gaither said. To calculate what's appropriate, add up the gross payroll—including holiday pay, sick leave and vacation pay, but leave out perks, taxes and pension plans.
The maxim Mr. Gaither adheres to is: Gross payroll should never exceed 45 percent of gross profit.
“You have to answer to someone. Mean-and-lean pays off,” Mr. Gaither said, adding that many shops can trim gross payroll to 30 percent during some months. The consultant pointed to an employee “boat rocker” as a prime drain on a company's payroll budget.
“This is the employee who never does anything. In fact, he's likely to complain that you're here, having fun in Las Vegas at the SEMA show,” Mr. Gaither said.
“Ninety percent of the time, the boat rocker is the right-hand man. Typically you and he built the business. But after 10 years, he doesn't work as hard.
“He's lackadaisical. If he is your right-hand man he needs to be productive. If he's not, he needs to go.”
Calling a 5-percent increase in sales, a 1-percent increase in gross profits and a 2-percent decrease in expenses “real and doable,” Mr. Gaither urged dealers to “go back and make this happen.”
A hypothetical profit-and-loss statement he provided showed how application of these steps could more than double net profit.
Chuckles swept the room when he recounted how one business owner who had successfully instilled tough cost controls came to him with a pressing question. “'OK. Now I can do what I want, right?' he asked me,” Mr. Gaither recalled. “I told him, 'Sure, you've done great.'”
“Good! I'm going to buy a helicopter!” the client replied.
The lessons appeared to hit home.
“This session was well worthwhile,” said Margaret Harlow of Harlow Tire & Service, which sells consumer and racing tires in Westland, Mich. “We need to do more of what the man's saying. Too often we make excuses as to why we can't do those things.”
But her husband Jim said they would have to stop short when it came to cutting staff. “It's so difficult to find good help these days that if we eliminated anyone, they'd just wind up working for our competition sooner or later,” he said.