The profit motive drives every business. The challenge in achieving profitability is in setting prices and managing costs. Prices will be determined by what the market will bear. Likewise costs are largely set by resource availability. For example the greater the availability of skilled technicians the lower the price they will command. In automotive repair the costs directly associated with the repair process are labor and parts (including tires). Indirect costs include the cost of the building, utilities, staff personnel, etc. Gross profit is calculated by subtracting direct costs from sales price. Actual profit is calculated by subtracting indirect costs from gross profit. In order to maximize profits it’s necessary to understand market conditions, know your overhead costs, manage and contain operating costs, set reasonable and achievable profit goals and ensure that they’re met. Following are keys to maximizing profit margins:
- Know Your Market – There are 2 basic variables that determine gross profit margin – price and cost. The price factor is determined by what the market will bear. There is a threshold that customers recognize in their minds as fair and anything beyond that will be viewed negatively. Costs also have a minimum that cannot reasonably be crossed. So it’s imperative to know maximum prices and minimum costs when seeking to attain desired profit margins.
- Know Your Fixed and Variable Overhead Costs – Gross profit is calculated as the difference between sales price and purchase cost. Actual profit is calculated by subtracting overhead costs from gross profit. Thereby a level of gross profit must be achieved in order that overhead costs are covered and actual profit can be realized. It’s important to identify and project future overhead costs when setting profit margin goals.
- Manage Your Costs – Whether they are direct costs (related to the automotive repair process) or indirect costs (overhead) containment is necessary. Directing efforts at driving costs down will ensure that desired profit margins are achieved.
- Set Target Profit Margins – As in any endeavor – realistic, achievable goals must be set. Target profit margins should be set for labor, parts and tires. The goals should be geared to attaining a reasonable profit while remaining competitive.
- Ensure Goals are Achieved – Profit margins must be monitored to ensure that goals are met. Quotes and repair orders must be checked against profit goals as they’re generated. This will ensure that target margins are met.