AKRON (July 5, 2004) — Hourly labor rates are an important and often misunderstood part of a larger equation, but they are not an end unto themselves.
Think profits instead of hourly labor rates, an automotive service software specialist told Tire Business.
The software specialist is Jerry Noble, president of Automotive Visions, developers of Take Charge Service Management Software (www.auto-vis.com). Mr. Noble is the antithesis of the ivory-tower geeks we associate with software development. To the contrary, he's steeped in the auto repair business, and his insightful views are borne of firsthand experiences.
Mr. Noble worked as a technician, service writer and shop manager in both auto repair and small-engine specialty shops. Then he spent nearly 20 years as a tool dealer, serving the entire gamut of automotive service facilities. Although his earlier jobs were eye-opening experiences, he gained his most valuable insights as a tool dealer. The two questions business owners asked him most often were, “What are my competitors doing?” and “What are they charging?”
It didn't take long for Mr. Noble to realize these owners were fixated on what they were charging instead of their ultimate goal—profitability. After all, profit is what the owner takes home every week. Although labor rates are important, they're only one of many factors that impact overall profitability.
To keep concepts simple, Mr. Noble gave a brief overview of what owners should keep in mind. First, income is money taken in from the sale of tires, parts, labor and subcontracted work (sublets).
Second, overhead encompasses mortgage payments or rent to utilities, salaries, benefits, training, equipment, etc. Basically, overhead determines the business' cost of doing business (CODB).
Third, calculating profit is easy. Subtract overhead and the cost of parts and sublets from income and the result is what the boss takes home.
Different owners demand or expect different amounts of profits from their businesses. What's more, overhead varies a great deal from one business to another. A combination of overhead and the desired profit determine what hourly labor rates should be as well as how much profit you need to make on tires, parts and sublets.
One common and fatal mistake was that owners didn't understand how much overhead varies from one business to another. Worse yet, when Mr. Noble asked owners what their monthly, weekly or hourly overhead was, no one seemed to know!
“Overhead differs from one business to another, so blindly applying what you think are your competitor's labor rates to your situation can be hazardous to the health of your business,” Mr. Noble emphasized. “I often hear shop owners obsessing over labor rates instead of discussing profit. The name of the game is not how much you charge or how many vehicles come through your door—it's how much money you put in your pocket.”
My own field experience mirrors Mr. Noble's. Countless auto service businesses have gone under because the boss insisted on meeting competitors' labor rates. Many of the bosses I meet who are obsessed with labor rates recoil when I suggest that they enroll in some automotive business management seminars. They brag about their years of experience and knowledge. But, like the owners Mr. Noble encountered, they can't cite their business' overhead numbers for me.
The bitter truth is that if they really understood the ultimate goal of profitability, they wouldn't be as distracted as they are by labor rates.
Anyway, you have to start from the ground up in order to manage profits, and a variety of factors affect profitability. Watch for my next column where I'll explore some strategies for generating more profits at your dealership or service shop.