- Message Boards
- Buyer's Guide
- Ask the Experts
Pauly Polish was sweating bullets. It was Friday and he was reviewing his checkbook. He could not figure out why his balance was shrinking on a week-to-week basis.
Pauly, like most detail business owners, worked hard each day to keep up with the volume of work that was coming his way. More work meant more money, didn’t it? Maybe not.
He sat back and thought hard. Had he given too much away on labor because he feared the sleaze balls down the street would undercut him? After all, he did not want to lose business to them. He buried his head in his hands envisioning a bag of dollars ― labor dollars ― being squeezed like a sponge into nothingness.
After a minute or two, it occurred to him that maybe he could ask his dealer customer for more money. A radical solution? Not really. He and his dealer customer were partners; at least that is what the manger told him when he got the account. So why not talk man-to-man with your business partner about the needs of the business? Seemed logical.
The following Monday, Pauly delivered his well-rehearsed story to his “dealer partner”. The manager smiled at his request for a rate increase, and answered in words that were music to his ears: “Sure, no problem”.
“One more thing though”, added the manager. “It’s only a formality, but since you want a rate increase, I need you to answer some questions. I need something tangible to give my dealer principal – something we can run up the flagpole without getting our heads cut off. Okay, partner?”
Pauly stared at the list, then at the manager. He turned pale and heard his voice crack as he asked him, “How do I find the answers to these questions?”
The manager was surprised at Pauly’s question and responded, “Job cost. I’m sure you’ve heard of job costing, haven’t you?” It was obvious that Pauly did not have a clue, so the manager explained: “Job costing is a method to measure the profitability of each detail job you do for our dealership or any other customer. It gives you the information you need to know if you are making money or need to make some changes. With this information, you may find that instead of raising prices, rather you need to be more efficient. Frankly, I can’t even consider giving you a rate increase and I know my dealer principal wouldn’t agree until you show us your job costs.”
Pauly sat back in his chair – disappointed, confused, at the same time, still hopeful. A whole new world had just been opened up to him. Now, all he had to do was to try to figure it out.
Knowing what it costs
While this exact scenario may never happen to you, it does illustrate a very important point: How do you know what you should charge or what you can afford to give away in terms of discounts unless you know how much it costs you to do a detail job? How can you increase your efficiency so that it will help you to greater profits, if you cannot handle job costing?
Job costing, in its simplest form, is taking the dollars you were paid to do a job and subtracting from it the money you paid to get the job done ― your costs for labor and materials. Overhead costs and burden should not be included. Once you have determined how much a detail job costs, then you can figure your gross profit in terms of a percentage. A good industry average should be about a 40 percent gross profit. After figuring your gross profit, then you deduct your fixed and variable expenses to arrive at a bottom line profit, or God forbid loss.
You have to know what your costs are because if you do not know these things then you are in trouble, because everything is blue sky after that.
Many detailers shy away from job costing because it is too much paperwork or because they were never that good at math in school. This is where today’s computerized management systems can be effective. Unfortunately, not everyone is automated. When you are computerized, it makes it relatively easy because you can track things on a computer a lot easier than you can manually.
Knowing the numbers is only a part of job costing. A true benefit is being able to identify where the inefficiencies are ― where you are losing money. You can receive $500 for a job, but if it cost you $425 you are not doing very well. Furthermore, the customer, especially the dealer, is not going to pay for your inefficiencies.
By the numbers
You can talk circles around job costing, just like gross profit. The way to figure gross profit may not be the same for all detailers. What costs do they put into their gross profit figure? What are the true costs of labor? Is he putting the cost of insurance and employee benefits in there, or is he putting that into overhead. Nobody seems to use the same rules. Some shops say they are achieving a 46% gross profit, but what are they plugging into (the calculations)? That is what you need to know.
Franchises operate by the same rules. In fact, one of the advantages of belonging to a franchise is being able to compare your numbers with other franchisees. The same information is used to calculate gross profit and these figures can be measured against the established benchmarks.
Certainly, the most difficult cost to compute is employee labor. As a rule, the following items need to be calculated in order to determine the true cost of labor: wage per hour; worker’s compensation insurance rate; state unemployment insurance rate; federal unemployment insurance rate; FICA rate; any medical benefits; uniforms; paid vacation, holiday, and sick day hours per year; other benefits; bonuses and commissions.
The true cost of labor must include all of the benefits because you are paying for them as a result of the volume you do. Some of the insurance taxes you have to pay are based on the hours your employees actually work as opposed to their total income.
Once you have figured what your labor costs per hour are for employees, then you multiply that by the number of hours worked on a particular job. When you are running these formulas, typically, 15 minutes one way or the other will not affect the efficiency or gross profit. If an employee spends 1 hour and 14 minutes on a job, you can charge the job 1 hour and it will not make that big of a difference. If they work 1 hour and 16 minutes, though, you might want to charge 1.5 hours.
In some cases, owners and employees can become worn down by the daily routine of micro-management (job costing every job).
In some shops, especially those where technicians are paid by the hour, spot job costing is an option. Rather than costing every job that comes through the shop, a vehicle is randomly chosen to be tracked through the shop. Simple detail jobs, such as a wash, engine clean, or carpet shampoo, would be a job costed infrequently because of their simplicity.
The greater concern for owners should be the full detail jobs. These types of jobs need to be tracked to see how long workers are taking to complete the entire job versus what was estimated and paid for by the customer. From there, you can look back and try to analyze any inefficiencies or excessive time it took to complete the detail.
Whether you track every job or spot check, it is helpful to have the full support of your detail staff. If you are spot checking, keep it as simple as possible and inform them of the randomly selected vehicle. This will help minimize any inconveniences, promote teamwork, and reduce tracking burnout. Of course, computerization can go a long way towards avoiding burnout.
Beyond job costing
Is gross profit an important measurement? Absolutely. Is job costing every detail job important? Possibly not. You job cost a job to make sure your process is working right. If you are really getting everything you can out of a job…and you really have all things working, then what is job costing every job going to tell you.
For example, if you have a $200 detail that takes all day to complete and a $500 job that takes 2 days to complete, what would be your dollars per day? What we are saying is that your gross profit can be very high on the $500 job, but if you cannot turn it around fast enough, it does not earn you (as many) dollars per day.
As to whether people should measure their gross profit on every job or spot check, that is an individual business decision. As to not job costing at all, well, that is probably not a good decision at all.
But whatever you do, gross profit is not the end-all. The key to a successful business in the 21st century is being able to do more with less ― or being able to do the same amount with a lot less. Why? Because you are not going to be paid ― and you are not being paid now ― for inefficiency. You have to find ways to turn around cars faster. If there is one thing I have heard, it is that detailers are recognizing that the faster they turn a car, the more money they actually make, regardless of the actual gross profit (per job) ― to a degree.
Say you have already maintained that gross profit because your system works right. You cannot squeeze any more out of it. You have done everything you could. Now, let us take that $500 job. What if we get rid of all those efficiencies ― the delays, the bottlenecks, etc.? What if we could eliminate all of that…and turn that car in one day instead of two? That is a much greater profit.
Remember, turn rate ― your prosperity is going to be based on faster turn rate.
Open the gate
Whatever approach you choose, keep in mind that in the years to come, if you do not do any tracking at all, you will no longer be a credible business in this industry.
Job costing is a key to the gate of prosperous business and a necessary step towards maximizing your efficiency on each detail job. Once you have turned that key, the gate will open to all types of opportunities to increase your profits. Dropping the key could prove disastrous.
To not job cost in the 21st century is tantamount to committing economic suicide. It is like taking a walk above the rim of the Grand Canyon blindfolded.