Fixed Operations: Reading Your Financial Statement Like a Pro

Transcription

1 Fixed Operations: Reading Your Financial Statement Like a Pro Brooke Samples President Profit Blueprints, LLC 1 Over the course of her career, today s presenter, Brooke Samples, has analyzed over 14,000 Dealership financial statements. Over the past 15 years, Brooke Samples has coached and motivated hundreds of Dealership Managers in all departments across North America. Using her monthly financial analysis, Profit Blueprints, she compares Dealers financial statements to key Benchmarks. She then uses her previous dealership experience, plus feedback from 15 years of Coaching & Consulting her Clients to help Managers utilize over 150 Action Plans. Your Presenter, Brooke Samples, President Profit Blueprints,LLC By implementing customized processes her clients reach their full Net Profit potential. She s proven that with good people, consistent training, the right plans, and a little good-natured "nudging", her Dealership clients can become very successful. Last year she became working with VW University, training their people to understand the opportunities hiddend in the financial statement. Before becoming a Consultant, she worked in Dealerships in a variety of upper management positions. She expanded her automotive knowledge while working for Lloyd Schiller s Dealer Service Corporation and later as part of NCM Associates. 2

2 LOTS OF NUMBERS! In this Webinar You ll Gain the Following Benefits: Learn How to Use your Financial Statement to Make 2013 Your Best Year Yet! 5 LOTS OF NUMBERS! In this Webinar You ll Gain the Following Benefits: Identify the key profitability accounts for Fixed Operations on the Financial Statement Calculate your Profit Potential using benchmarks and simple formulas Understand how some accounts may impact positively or negatively other accounts 6

3 LOTS OF NUMBERS! Recognize when Too Good is Too Good Determine if you are staffed for maximum profits and for future growth Calculate the days of supply for key assets and actions to take when they are out of line Prioritize your action plans to set record Net Profits Create your own monthly tracking spreadsheet 7 FINANCIAL STATEMENT YOUR REPORT CARD Balance Sheet Expenses Sales & Gross Profits 8

4 KEY PERFORMANCE INDICATORS Puts the data into perspective Targets (Internal/External) Trends 9 KEY PERFORMANCE INDICATORS Most KPIs are % Allows Us to Compare Stores of Different Sizes 10

5 KEY PERFORMANCE INDICATORS Some KPIs are Franchise Specific, Such as Hours per Repair Order or GP per Employee 11 AVAILABLE TARGETS NADA 20 Groups Manufacturer Reports CPAs Independent Consultants Dealer Group 12

6 FINANCIAL STATEMENT SALES AND GROSS PROFITS Sales _ Cost of Sales = Gross Profit 13 FINANCIAL STATEMENT SALES AND GROSS PROFITS When you can Increase Gross Profit your Pay Plans will determine how much will show up in the Net Profit 14

7 FINANCIAL STATEMENT SALES AND GROSS PROFITS Remember how much you spent to increase the Gross Profit! 15 ONE TRANSACTION 1 Hour of Labor Sold $100 1 Hour of Tech Time $25 Parts Sale Price $60 Cost of Parts $35 Shop Supplies $ 8 Sales Tax $10 Total Invoice $178 16

8 LABOR GROSS PROFIT Labor Sale $100 Tech Pay (COS) $25 Gross Profit $75 Gross Profit $75 Labor Sale $100 = 75% 17 PARTS GROSS PROFIT Parts Sale $60 Parts Cost $35 Gross Profit $25 Gross Profit $25 Parts Sale $60 = 41.7% 18

9 ONE TRANSACTION FINANCIAL STATEMENT SALES/GP Account Name Sales Gross Profit % GP CP Labor $100 $ % CP Parts $60 $ % 19 SERVICE TARGETS GROSS PROFIT % RETAINED RANGE Account Description Domestic Import Highline Customer Pay Labor Gross Profit 73%+ 76%+ 78%+ Warranty Parts Gross Profit 74%+ 78%+ 80%+ Internal Parts Gross Profit 74%+ 78%+ 78%+ NVI/PDS/Road Ready 86%+ 84%+ 84%+ Sublet (Combined with Warranty) 10%+ 10%+ 10%+ 20

10 PROFIT POTENTIAL GROSS PROFIT TARGETS Gross Profit / Sale = % $70,000 / $100,000 = 70% (.7) If last month we were at 65%, then we are doing better. If the target is 73%, then we are worse then top performing Service Departments and we have opportunities! 21 PROFIT POTENTIAL $70,000 / $100,000 = 70% If the Target is 73%, how much profit are we missing? (Target % Dealer %) x Sales = Profit Potential 73% - 70% = 3% x $100,000 = $3,000 $3,000 x 12 months = $36,000 a year 22

11 PARTS TARGETS GROSS PROFIT % RETAINED RANGE Account Description Domestic Import Highline Customer Pay Parts Gross Profit * 38%+ 40%+ 42%+ Body Shop Parts Gross Profit 30%+ 30%+ 32%+ Warranty Parts Gross Profit * * Internal Parts Gross Profit 25% - 30% + 25% - 33% + 25% - 34%+ Counter Retail Parts Gross Profit 35% + 35% + 35% + Wholesale (More than $250K Sales)*** 17% 18% 20% Wholesale (Less than $250K Sales)*** 23%+ 22%+ 23%+ * Without Tires ** If Warranty Markup is 40% 28.60% 28.60% 28.60% ** If Warranty Markup is 60% 37.50% 37.50% 37.50% *** Including W/S Comp & Incentives 23 PROFIT POTENTIAL GROSS PROFIT TARGETS Gross Profit / Sale = % $35,000 / $100,000 = 35% If last month we were at 32%, then we are doing better. If the target is 38%, then we are worse then top performing Parts Departments and have opportunities! 24

12 PROFIT POTENTIAL $35,000 / $100,000 = 35% If the Target is 38%, how much profit are we missing? (Target % Dealer %) x Sales = Profit Potential 38% - 35% = 3% x $100,000 = $3,000 $3,000 x 12 months = $36,000 a year 25 ONE TRANSACTION 1 Hour of Labor Sold $100 1 Hour of Tech Time $25 OR 1 Hour of Labor Sold $80 1 Hour of Tech Time $25 $75 75% $55 68% 26

13 SERVICE DEPARTMENT 68% 75% Increase our Selling Price or Reduce our Cost of Sales 27 SERVICE DEPARTMENT Increase our Selling Price Competitive Items Shouldn t go too much above market Price shopped in the last 6 months? 28

14 SERVICE DEPARTMENT Increase our Selling Price Precision (A Skilled) Labor Rate 20% - 30% above your Posted Rate Driveability/Diagnostic Repair - Electrical Wiring &Circuitry Internal Automatic Transmission/Transaxle Repairs Internal Engine Diagnostics/Repairs Ring and Pinion Replacements Supplemental Restraint System 29 SERVICE DEPARTMENT Increase our Selling Price Monitor Unauthorized Discounts Exception Reports Reynolds & Reynolds: 3619 Report ADP: REX Report 30

15 SERVICE DEPARTMENT Decrease our Cost of Sales Make sure the Techs are paid the correct amount and time per job The Right Tech gets the Right Job 31 SERVICE DEPARTMENT Decrease our Cost of Sales Use lower-paid Technicians Reduce time allowances paid to the Technicians Have a separate maintenance pay rate for your Technicians Pay a flat amount for a job regardless of which Technician works on it. 32

16 CLOCK HOURLY TECHNICIAN $14.00/Clock Hour for 40 Clock Hours Completes only 20 Billable Hours (Flat Rate) Paid 40 Clock Hours $ FRHs X $14.00 = $ $28.00 Cost of Sale per Billable Flat Rate Hour 33 CLOCK HOURLY TECHNICIAN Paid 40 Clock Hours X $14.00 = $ Completes only 20 Billable Hours (Flat Rate) 20 FRHs x $14 = $280 C.O.S. 20 Clock Hours x $14 = $280 ADJUSTED C.O.S.! Or Unapplied Time. Per WEEK! 34

17 When Too Good is TOO Good Sales = $100,000 Gross Profit = $85,000 GP Retention = 85% 35 When Labor GP is Too Good to be True Check Other Accounts Unapplied Time - Reconciliation Advertising Coupons and Discounts Personnel Hourly Folks Outside Services -??? 36

18 Customer Retention COMPARE Customer Pay Labor Sales (Including Quick Service & Factory Paid Maintenance) To Warranty Labor Sales 37 Customer Retention COMPARE $50,000 in CP Labor Sales $18,000 in Warranty Labor Sales $50,000/$18,000 = 2.77 TARGET = > 3 38

19 PARTS DEPARTMENT INCREASE OUR SELLING PRICE Monitor Unauthorized Discounts Exception Reports Reynolds & Reynolds: 2542 Report ADP: ROV Report 39 PARTS DEPARTMENT INCREASE OUR SELLING PRICE Priced Competitively Other Parts Accounts too HIGH WHO Can Change Parts Sales Prices? Check for Changes in Labor Pay Type Tires Track Separately Warranty Charge Backs 40

20 PARTS DEPARTMENT DECREASE OUR COST OF PARTS If the Inventory is TOO Skinny or not Accurate: TOO Many Outside Purchases from Like-Franchised Dealers Factory Programs for Bulk Purchases 41 When Parts GP is Too Good to be True Check Other Accounts Other Parts Accounts too Low Advertising Coupons and Discounts Wrong Cost Amount Check Exception Reports 42

21 HOURS BILLED PER RO Labor Rate $100 # RO SALES GROSS PROFIT G.P.% Mech. Labor 190 $36,480 $25,530 70% ($36,480 / 190) / $100 = 1.92 Billed Hours Per RO Different from DMS Report 43 HOURS BILLED PER RO Avg Avg CP Labor Sales $31,000 $36,480 # CP Repair Orders Labor Sales per CP Repair Order $ $ Posted Labor Rate $85 $100 Hours Per Repair Order

22 Calculate Gross Profit Per Hour Billed Total Labor Sales Posted Labor Rate* = $100,000 $100 = 1,000 Billed Hours *Use Repair Rate or Warranty Rate Effective Labor Rate 45 Calculate Gross Profit Per Hour Billed Total Labor Gross Profit Billed Hours = $65,000 1,000 = $65 Labor Gross Profit Per Billed Hour 46

23 Gross Profit Per Hour Billed During 1 Week Each Technician Wastes an Hour -Holding for Authorization -Looking for a Vehicle/Tools -Waiting For Parts $65 Labor Gross Profit Per Billed Hour 47 Gross Profit Per Hour Billed 10 Techs x $65 = $650 X 52 Weeks = $33,800 Parts Gross Profit = $35 X 52 Weeks = $18,200 Annual Potential Gross Profit = $52,000 48

24 FINANCIAL STATEMENT Gross Profit _ EXPENSES = NET PROFIT SELLING GROSS PROFIT DEPARTMENTAL PROFIT 49 DIFFERENT FINANCIAL STATEMENTS Net Profit After ALL DEPARTMENT EXPENSES GM and IMPORTS Selling Gross Profit (Ford) (Department) Net Profit (Chrysler) After Most CONTROLLABLE EXPENSES 50

25 FINANCIAL STATEMENT EXPENSES Listed from most controllable to the least controllable 51 FINANCIAL STATEMENT EXPENSES Personnel Expenses Semi-Fixed You have some control Fixed 52

26 FINANCIAL STATEMENT EXPENSES When you can reduce an Expense, most of the reduction will show up in the Net Profit 53 PROFIT POTENTIAL EXPENSE TARGETS Shown as a % of the Department s Gross Profit Expense / Gross Profit x 100% = Expense % 54

27 ONE TRANSACTION 1 Hour of Labor Sold $100 1 Hour of Tech Time $25 Parts Sale Price $60 Cost of Parts $35 Shop Supplies $ 8 Sales Tax $10 Total Invoice $ ONE TRANSACTION SERVICE DEPARTMENT FINANCIAL STATEMENT EXPENSE Account Name % GP Service Gross Profit $75 Supply Expense ($8) -10.7% 56

28 SERVICE TARGETS KEY EXPENSES RANGE Account Description Domestic/Imports Ford/Chrysler Personnel/Employment 50% - 30% - Advertising Expense * 3% - 3% - Policy Expense 2% - 2% - Supply Expense (net) 1% - 1% - Domestic/Imports Highline Company Vehicle ** 2% - 6% - * If used only for true advertising - not discounts 57 PARTS TARGETS Account Description Personnel/Employment Advertising Expense * Policy Expense Supply Expense (net) Company Vehicle ** KEY EXPENSES 1% - Domestic/Imports 2% - * If used only for true advertising - not discounts ** If not a big Wholesaler 40% - 2% - 1% - RANGE Domestic/Imports Ford/Chrysler 25% - 2% - 1% - 1% - Highline 6% - 58

29 PROFIT POTENTIAL EXPENSE TARGETS Policy Expense / Gross Profit = % ($3,300 / $65,000) x100% = 5% If last month we were at 7%, then we are doing better. If the target is 2%, then our policy expense is worse then top performing departments and we should examine it closely. 59 PROFIT POTENTIAL $3,300 / $65,000 = 5% If the Target is 2%, how much is our excess policy costing us? (Target % Dealer %) x Gross Profit = How much we should Reduce our Policy Expense? 2% - 5% = -3% x $65,000 = -$1,950 $1,950 x 12 months = $23,400 a year 60

30 EXPENSES MONTH YTD NET SALES $ 100,000 % of Sales $ 550,000 % of Sales GROSS PROFIT $ 65, % $ 350, % EXPENSES % of Gross Profit % of Gross Profit Personnel/Employment $ 29, % $ 165, % Advertising $ 2, % $ 25, % Supplies $ 1, % $ (450) -0.1% 61 Personnel Expense Too High? 1. Get Payroll Detail of Department. a. Are these people in the correct Department? b. Is their PAY being calculated correctly? 2. How Paid, on Sales, Gross Profit, Production? Weekly or 3. Performance Measurement and Information Standards 4. Recruiting, Screening, Hiring 5. Can you offset with increased Gross Profit? 62

31 SEMI-FIXED Create Sub-Accounts Example: Policy Expense Comebacks Lot Damage Missed Estimates Service Contract Deductibles not Collected 63 EXPENSE CONTROLS FOR SHOP SUPPLIES Shop Supplies 1. Get rid of those Service Department Shop Supplies R.O. s 2. Weekly Individual Technician Counter Tickets 3. Control and Measurement 4. Customers Portion 64

32 FINANCIAL STATEMENT Page 1 Balance Sheet Assets _ Liabilities Bills = NET WORTH 65 ONE TRANSACTION (S) Labor Sale Acct. ($100) (S) Cost of Labor (COS) $25 (B) Work in Process ($25) (S) Parts Sale Acct. ($60) (S) Cost of Part (COS) $35 (B) Parts Inventory ($35) (E) Supply Expense ($ 8) (B) Sales Tax Payable ($10) (B) Cash paid by Customer $178 ($233) $233 66

33 ONE TRANSACTION BALANCE SHEET Account Name ASSETS LIABILITIES Cash $178 Parts Inventory ($35) Work in Process ($25) Sales Tax Payable $10 Net Worth (Profit) $108 Totals $118 $ ONE TRANSACTION (E) Service Advisor Comm. $8 (E) Counter Person Comm. $3 (E) Management Comm. $2 (E) Payroll Taxes $1 (E) Credit Card Fees $3 (B) Accounts Payable ($10) (Supply) (B) Payroll/Taxes Payable ($14) (B) Credit Card Fees Payable ($3) 68

34 ONE TRANSACTION BALANCE SHEET Account Name ASSETS LIABILITIES Cash $178 Accounts Payable $10 Comm./Taxes Payable $13 Credit Card Fees Payable $3 Parts Inventory ($35) Work in Process ($25) Sales Tax Payable $10 Net Worth (Profit) $82 Totals $118 $ ONE TRANSACTION BALANCE SHEET Account Name ASSETS LIABILITIES Cash $82 Accounts Payable $0 Comm./Taxes Payable $0 Credit Card Fees Payable $0 Parts Inventory $0 Work in Process $0 Sales Tax Payable $0 Net Worth (Profit) $82 Totals $82 $82 70

35 DAYS SUPPLY Calculate the Cost of Sales Sale Gross Profit = Cost of Sales GL Inventory Balance / Cost of Sales x 30 = Days Supply 71 DAYS SUPPLY TARGETS SCHEDULED ACCOUNTS SERVICE/PARTS/BS RECEIVABLES = 15 WARRANTY RECEIVABLES = 7 15 WORK IN PROCESS = 3 10 (with BS) SUBLET IN PROCESS = 5 15 = HALF A MONTH 72

36 DAYS SUPPLY TARGETS PARTS INVENTORY = (Do not include discounts/adjustments) Tires/Oil Separate Accounts 73 Where to Start GRADE THE SERVICE DEPARTMENT C B A Net Profit Profit % GM and Import < 10% > 15% > 20% Department / Selling Gross Ford or Chrysler < 35% > 40% > 50% 74

37 Where to Start GRADE THE PARTS DEPARTMENT C B A Net Profit Profit % GM and Import < 20% > 30% > 40% Department / Selling Gross Ford or Chrysler < 35% > 40% > 50% 75 Grade Your Department C = Examine Your Expenses B = Yield Per Customer A = Growth 76

38 Your Opportunities EXPENSES Compare Your Net Profit Retention to Target Look at Key Expenses to Targets Calculate Excess Expense (Target % - Dealer %) x Gross Profit What can be reduced? 77 GROSS PROFIT Your Opportunities Compare Your Gross Profit Retention to Targets Calculate Profit Potential of Accounts Below Target (Target % - Dealer %) x Sale Where are the Opportunities? 78

39 END OF MONTH BEFORE FINANCIAL IS PRINTED Review Key Expenses Accounts Advertising, Policy, Loaner Vehicle, Supplies Reconcile GL Work-in-Process & Sublet Schedule. (Open Repair Order Report) Review Receivables Schedules Reconcile GL Parts Inventories against DMS Parts Inventory 79 PLANNING FOR NEXT MONTH $65 Labor Gross Profit Per Billed Hour Plus Parts Gross Profit for CP = $35 Per Billed Hour $100 Gross Profit per Hour Billed 80

40 PLANNING FOR NEXT MONTH Target Net Profit = $ 20,000/mo. Average Expenses = $ 80,000/mo. Need Gross Profit = $100,000/mo. Need $100,000 in Gross Profit to Reach $20,000 Net Profit 81 Gross Profit Per Billed Flat Rate Hour = $65.00 $100,000 Gross Profit /Mo. $ Gross Profit/ FRH = 1,538 FRHs 1,538 FRHs 160 FRH s/tech 1,538 FRHs 200 FRH s/tech = % Or = % 82

41 EMPLOYEE PRODUCTIVITY Number of Repair Orders per Service Advisors Customer Pay and Warranty RO s per day: Time to handle Customers = Write-up (?) Follow-up (?) Delivery (?) 30 minutes? At the most 15 Customers can get good service. Steps may be "dropped" including - Greeting, Listening, Questioning, Selling, Follow-up, Follow-through, Active Delivery, etc. 83 EMPLOYEE PRODUCTIVITY Technicians to Service Advisors 3 4 Techs to 1 Service Advisor Each Tech flags 10 hours a day. 3 Techs x 10 hrs a day = 40 hours. Number of hours per Repair Order = 2 30 hours /2 hours per Repair Order = 15 Repair Orders a day. 84

42 EMPLOYEE PRODUCTIVITY RED LOBSTER Reversed its July 2012 policy of wait staff ratio from 4 Customers to 1 Waiter/ress to 3 Customers to 1 Waiter/Waitress 85 Tracking Your Opportunities A B C D E F YTD Avg. January February FORMULA 3 4 # Customer Pay Repair Orders Customer Labor Sales $41,873 $39,128 $44,618 6 Gross Profit Target $29,579 $27,400 $31,758 7 Percent Retained 73% 30.06% 70.03% 71.18% +E6/E5 8 Missed Opportunities $1,163 $813 +($B7-E7)*E5 9 Labor Sales Per Repair Order $195 $196 $194 +E5/E4 Enter # from Financial Statement in White Cells, Targets in Orange Cells, Formulas in Yellow and Green Cells 86

43 Tracking Your Opportunities A B C D E F YTD Avg. January February FORMULA 3 4 TOTAL PARTS SALES $114,300 $124,500 $104,100 5 Total Gross Profit $34,915 $37,350 $32,479 6 EXPENSES Target 7 Other Personnel Expense $12,882 $13,452 $12,312 8 Personnel as a % of GP 35% 36.0% 37.9% +E7/E5 9 Excess Expense (Shown in Red) ($380) ($12,312) +($B8-E8)*E5 10 Supplies $858 $213 $1, Supplies as a % of GP 1% 0.6% 4.6% +E10/E5 12 Excess Expense (Shown in Red) $161 ($1,502) +($B12-E12)*E5 Enter # from Financial Statement in White Cells, Targets in Orange Cells, Formulas in Yellow and Green Cells 87 The Future If you focus on one underperforming account each month, at the end of the year you will have improved 8 accounts! 88

44 The Future If I Don t Change the Processes Affecting this Account WHAT WILL IT LOOK LIKE 6 MONTHS FROM NOW? 89 CONCLUSION! Brooke Samples, President Profit Blueprints,LLC Profit Blueprints, LLC Dealership-Proven Plans for Net Profit Improvement 90

45 Plan Like a Pro If Service Expenses High: Thought Starters Confirm expenses are posted to the correct department. Service Direct Personnel Expenses (without allocations or benefits) should be 30% or less. Are employee bonuses calculated correctly? Are pay plans based on productivity? Service Advisor pay plans should not be paid on Labor Sales as Labor Rates increase Service Advisors get automatic pay raises. Service Advisors should be paid the same time period as Techs not a draw, but the commission earned. Use sub-accounts to track expenses like advertising or policy. Ex: Advertising discounts, If Labor Gross Profit Retention Percentages are Low: Run daily exception report to confirm staff is not overriding the established prices. Paying Techs too much time for maintenance work that is sold at a lower rate. Solution to higher paid Techs doing low skilled work pay a flat amount for certain jobs regardless of the skill level. Establish a precision labor rate 20% - 30% above door rate for work requiring highly skilled Techs. Dispatch the right work to the right Techs Any hourly or salaried Techs? How much are they really costing the Dealer per flag hour? If Sales per Repair Order are Low: Analyze the repair orders for vehicle age and mileage. If below 5 years or 75,000 miles the Dealership should focus on Customer retention. Higher mileage vehicles = higher dollar per repair order Do the Service Advisors use a maintenance menu to sell from including benefits? Review the Multipoint Inspection process for gaps in performance either by the Service Advisor or the Techs. Is there a second effort (TO) process in place when the Customer says, No? Do the Service Advisors have enough time to follow-up with Customers (Average CP and Warranty R.O.s a day allows enough time, more than that the Service Advisors become order takers.) If Technician Productivity is Low: Are the right Techs getting the right jobs? Do the Service Advisors do a GOOD job at completing the repair order? Do we have a GOOD parts inventory to sell from? Are productivity goals set and monitored for Techs and Service Advisors (daily, weekly, monthly)? Do we confirm the Customers reservations? Are special tools, the necessary equipment, TSB and manuals easily accessible by the Blueprintforprofits.com 2013 Profit Blueprints, LLC

46 Plan Like a Pro If Body Shop Expenses High: Thought Starters Confirm expenses are posted to the correct department. Body Shop Direct Personnel Expenses (without allocations or benefits) should be 30% or less. Are employee bonuses calculated correctly? Are pay plans based on productivity? Estimators pay plans should not be paid on Sales, as labor rates and parts prices increase the Estimators get automatic pay raises. Estimators should be paid the same time as Productive Staff not a draw, but the commission earned. Use sub-accounts to track expenses like advertising or policy. Ex: Policy, shortages, comebacks, shortages If Gross Profit Retention Percentages are Low: Not filing for supplements when warranted. Paying Productive staff more time than the estimate allotted. Department paying for helpers instead of the Body Men or Painters. Any hourly or salaried Productive staff? How much are they really costing per flag hour? Using the sublet and materials accounts for paying the Productive Staff more without having to file a supplement. Materials painter over mixing, reconcile the mixing machine reports to the estimates If Technician Productivity is Low: Are we doing a good job with DRPs? Do the Estimators do a GOOD job at writing the estimate? Is there a quality control process that each step is signed off on, which includes date and time? Are productivity goals set and monitored for Productive Staff and Estimators (daily, weekly, monthly)? Do we confirm Customer reservations, that the necessary parts are here, and they are the correct parts? Are special tools and the necessary equipment up-to-date and easily accessible by the Productive Staff? Blueprintforprofits.com 2013 Profit Blueprints, LLC

47 Plan Like a Pro If Parts Expenses High: Thought Starters Confirm expenses are posted to the correct department. Parts Direct Personnel Expenses (without allocations or benefits) should be 25% -30%. Are employee bonuses calculated correctly? Are pay plans based on productivity? Pay plans should not be paid on Parts Sales as parts prices increase the counter people get automatic pay raises. Use sub-accounts to track expenses like advertising or freight. Ex: Freight for returns, shipping in, shipping out. If Gross Profit Retention Percentages are Low: Run daily exception report to confirm staff is not overriding the established prices. Poor parts inventory requiring excessive emergency purchases. Employees purchases are excessive (Counter Retail). Discounts being misapplied. If Parts Inventory is too High: Are we doing perpetual inventories? Customer Pay special order parts should be pre-paid. For Warranty special order parts the Customer should have an appointment set before the part(s) are ordered. Review DMS management reports for aging and stocking status. (2213 for R&R, MGR for ADP) 65% + for Normal or Active Parts. Dealership performs monthly reconciliations of Parts Inventory General Ledger compared to Parts Management report. Blueprintforprofits.com 2013 Profit Blueprints, LLC

48 Profit Blueprints Right Now Solutions Customer Labor Low Gross Profit Action Plan S1 YES NO Q9 A9 When you have to discount work to get a job or an account, do you convert Technician Pay Rates or time allowed to maintain a profitable Labor Gross Profit? When you discount your labor to get a job or to secure a fleet account, look at adjust the time paid to the Technician on the job. The table below shows how you can maintain your Gross Profit retained, while bringing in new Customers. Your Average Labor Rate = $ Fleet Discounted Rate = $90.00 Divide the Discounted Rate by your average Labor Rate to get a %. $100. $90. = 90.% = Percentage of hours to pay Technician 90.% x 10.0 FRH on Estimate 10.0 FRH x $90.00 Fleet Labor Rate 9.0 FRHs Paid to Technician at $25.00 $ Cost of Sale $ Labor Sale = 9.0 FRH paid to Technician = $ Sale Tech paid for Job = $ = 24.4% Cost of Labor or 75.5% Gross Profit Versus 72.2% without the labor time adjustment YES NO Q10 A10 Are all of your productive Technicians paid commissions based on the hours they flag? (Not clock hourly or salaried.) Technicians who earn their living based on their productivity will have more incentive to produce more work. If you have apprentices or helpers who are paid by the clock hour, do they have a clearly defined job path? Does it spell out their progress against a time line? If you would like help in developing a career path please call us at Do you have any Technicians who are paid a weekly salary? Can their pay be converted to commission based on the hours they turn? Copyright 11/1/ All Rights Reserved. Reproduction For Any Reason Is Prohibited. 1

49 Profit Blueprints Right Now Solutions A1 LABOR ADJUSTMENT ACCOUNT HIGH WORK/LABOR-IN-PROCESS INVENTORY Although Work/Labor-In-Process often confuses people, it does not have to be complicated. In its simplest form, Work/Labor-In-Process is a month-end inventory that includes the Technicians payroll in dollars (at the Cost for Service and Body Shop Labor) for which the Technicians have already been paid, but for which we have not completed the billing process. See the following example of a Work/Labor-In-Process scenario: On the 27th of the month, we began overhauling the engine on a Customer's car. After disassembling the engine, we ordered the necessary parts. On the 30th, we had not received the parts, but had paid the technician 6.0 Flat Rate Hours for his work up to that point, so on the end-of-month Work-In-Process Inventory, we will include the 6.0 Flat Rate Hours pay multiplied by the Technician's pay rate (Cost of Sale). WORK/LABOR-IN-PROCESS INVENTORY OPTIONS There are three ways to perform a Work-In-Process Inventory: the traditional method, the computer method, and purely electronic Technician flagging. The following instructions describe the step-by-step procedure to follow for each method: Traditional Method. In the afternoon of the last working day of the month, the Service Manager and the Body Shop Manager must collect all open Repair Orders from their respective departments, including Repair Orders that were turned into the Cashier and are not final billed or final invoiced yet. When all the Repair Orders are gathered, each department manager must follow these steps: 1. List all Technician flags on the Work-In-Process Log 2. Extend each entry by FRH and pay for the individual Techs. 3. Calculate the total Tech pay and write it at the bottom. Computer Method. The computer method of tracking your monthly Work-In- Process is probably the most efficient because it saves a lot of redundant time and paperwork. However, the only way a computer-generated list of Work-In- Copyright All Rights Reserved. Reproduction For Any Reason Is Prohibited. Profit Blueprints, LLC

50 Profit Blueprints Right Now Solutions A1 LABOR ADJUSTMENT ACCOUNT HIGH WORK/LABOR-IN-PROCESS INVENTORY Process Inventory will be accurate is if you post every Technician flag by Repair Order number, Technician number, and line onto your Service or Body Shop invoicing system as the flags are issued. If you do not meet these requirements, the Inventory will be off, and the Service and Body Shop Managers will end up scrambling to find Lost Labor that doesn t match up to payroll. Purely Electronic Flagging. Purely Electronic Flagging means that you flag ALL Technician hours directly through the computer invoicing system. As long as ALL Technician payroll is addressed solely through electronic flagging and costing, the computer system s Work-In-Process report will be accurate. If the Service Department uses electronic flagging (currently, 70% of Dealership Service Departments do), but the Body Shop does not, then the Body Shop must choose one of the other methods to perform their monthly inventory. Although the choice of W.I.P Inventory method is entirely up to you, keep in mind that it is the Service and Body Shop Managers responsibility to conduct these inventories each month and deliver a copy to the Controller/Office Manager not vice versa. The Controller/Office Manager is responsible for adjusting the General Ledger to the actual (or physical) Work-In-Process Inventory. QUESTIONS ABOUT WORK/LABOR-IN-PROCESS INVENTORIES At this point, the following question remains unanswered, Why do I need to take a Work-In-Process Inventory? The simple answer is that WIP is an extremely important process which would garner more serious consideration if the factories had correctly labeled it "Payroll Dollars In Process For Which We Must Account. A more complete answer to this and related questions are addressed on the next few pages. Why do we need to take a Work-In-Process Inventory?" The Work-In-Process Inventory Account helps prevent mismanagement that can have a severe financial impact on the Service Department or the Body Shop. Furthermore, it draws management's attention to Open Repair Orders much more keenly than simply scanning a summary screen or printout. It's the same as the Sales Manager walking his inventory versus looking at his inventory on a printout. If you could count on the computer to evaluate the Work-In-Process or the New and Used Car Inventory, we sure wouldn't need many managers. Copyright All Rights Reserved. Reproduction For Any Reason Is Prohibited. Profit Blueprints, LLC

51 Profit Blueprints Right Now Solutions A1 LABOR ADJUSTMENT ACCOUNT HIGH WORK/LABOR-IN-PROCESS INVENTORY "When should we take the Work-In-Process Inventory?" To ensure accuracy, perform the Work-In-Process Inventory during the evening of the last working day of every month. Take your list of open Repair Orders, either from your computer or a manual list, and make sure all vehicles and open items are accounted for. While you do this, evaluate the vehicles. Is the work complete? If so, why is the vehicle still here? If you have a vehicle on your lot and you don t find a vehicle on the list of open Repair Orders, why hasn t paper work been processed? In Service, pay particular attention to open repairs over one week old. In the Body Shop, look closely at open Repair Orders that are over two weeks old. How do we take Work-In-Process Inventory?" An example of a Work-In-Process Inventory Form is attached to the end of this CPR, and it illustrates exactly what you need to account for on the Work-In-Process Inventory. By listing all open Work Orders (Repair Orders), you should be able to completely reconcile your Missing Document List. By listing any labor flagged, along with the Technician's number and extended cost, Technician payroll should reconcile. By listing all Sublet at cost plus the vendor name, we should be able to reconcile the Service & Body Shop Sublet Inventory account at the same time. My favorite way to manage the Work-In-Process is to set the account up as a scheduled account, controlled by the Repair Order Number. When the Repair Orders are closed the labor is posted to the WIP schedule under each RO number. Some DMS systems allow the posting of payroll to clear the account, but if not the process is well worth the effort if there is a problem. Post the Technicians payroll amount to the schedule under his or her employee number. Then manually enter the debit amount paid to the Technicians for each Repair Order and credit the amount payroll shows under the Technicians number. This process is especially useful in the Body Shop. For more information, please call Brooke at Copyright All Rights Reserved. Reproduction For Any Reason Is Prohibited. Profit Blueprints, LLC

52 Profit Blueprints Right Now Solutions A1 LABOR ADJUSTMENT ACCOUNT HIGH WORK/LABOR-IN-PROCESS INVENTORY "What happens if the accounts don't balance?" Assuming there are no missing Repair Orders, there are six main reasons the accounts will not balance: 1. The Cost of Labor applied to Repair Orders or invoicing is incorrect usually due to out-of-date information or incorrect calculations. Check your Technician pay rate on the Service side of your system against payroll s rate every month to ensure you always use accurate cost. 2. The Technician flags are incorrectly posted (non-invoicing dealers). This may be an occasional occurrence or a routine problem. 3. There are missing Repair Orders due to management sloppiness, or malfeasance. 4. Malfeasance on the part of a Technician or Technicians whereby they alter the hours flagged on the portion of the Flag Sheet or Job Ticket turned into the Accounting Office so that it reflects more hours than were flagged on the Repair Order. For example, 1.0 hours might be changed to 11.0 hours. For this reason we recommend, if at all possible, you convert to electronic payroll for Technicians. 5. Collusion between a Technician and the person who flags Technician hours (similar to above example) where the guilty parties agree to split any money the company overpays. 6. Payroll posts items that are not true Work-In-Process. Inadvertently, time paid to Technicians for vacation, training, or guarantees could have been charged to the Work-In-Process account instead of an expense account. Ideally, the outcome of your monthly Work-In-Process Inventory is that you can account for everything, everything balances out, and you can get back on top of a few jobs you forgot about. On the other hand, the worst that can happen is you discover any or all of the above six points has occurred in large dollar amounts. At the same, time, if the Work-In-Process helps you uncover these problems, you can correct them. Copyright All Rights Reserved. Reproduction For Any Reason Is Prohibited. Profit Blueprints, LLC

53 Profit Blueprints Right Now Solutions A1 LABOR ADJUSTMENT ACCOUNT HIGH WORK/LABOR-IN-PROCESS INVENTORY ACCOUNTING RESPONSIBILITIES The Accounting Department is responsible for making sure all Repair Orders are posted and/or accounted for at the end of each month, with the cooperation of the Service and Body Shop Departments. The following list highlights information that the Service Department and Body Shop need to provide the Accounting Office: All voided Repair Orders and an accurate list of open Repair Orders so the office can account for all missing documents. The computer print out of time owed to Technicians or the unpaid Flag Sheets for the Technicians. The open Repair Orders along with the Technicians labor costed out and the time owed to the Technicians so the office can accurately reconcile the Work-In- Process account. Accruing Work-In-Process is both conceptually correct and practical. A liability to pay Technicians for the odd days of the month certainly exists, and therefore should be included in the liability section of the financial statement under accrued payroll. Furthermore, the accrual will eliminate some of the large swings in Work-In-Process and provide an apples to apples comparison to the open Repair Order list. A simple calculation, as pictured below, will show whether your actual Work-In-Process balances with your General Ledger. General Ledger Balance at End of Month $ Plus Accrual of Labor at Cost on Unpaid Flag Sheets +$ Total Work-In-Process =$ Less Labor at Cost on Open Repair Orders ($ ) Variance to Be Adjusted =$ Copyright All Rights Reserved. Reproduction For Any Reason Is Prohibited. Profit Blueprints, LLC

54 Profit Blueprints Right Now Solutions A1 LABOR ADJUSTMENT ACCOUNT HIGH WORK/LABOR-IN-PROCESS INVENTORY Post any adjustments to your Adjusted-Cost-Of-Sale account or your Unapplied Time account. Inform the appropriate department manager of any adjustments so he/she can sign off on it just like any other expense. If you have a Body Shop, use a different sub-account for the Body Shop Work-In- Process. If you service more than one manufacturer and have different Technicians for each manufacturer and/or different labor types and Sales/Cost of Sale accounts for each manufacturer, you should also use a different Work-In-Process sub-account. ADDITIONAL CONSIDERATIONS If your Work-In-Process Inventory exceeds the DSC guide, but you ve verified that the General Ledger balance is accurate, you ve written off any unapplied time, and all vehicles on the open Repair Order list are accounted for, then you must determine why your balance is so high. The obvious reason is because the vehicles are not completely repaired by the end of the month and the appropriate paper work has not been processed and completed by the end of the month. But that is just the beginning. You must also determine WHY so many Repair Orders remain open at the end of the month. Too many open Repair Orders also reflect in the Parts Inventory, the Sublet Inventory and, if applicable, the Paint and Materials Inventory, distorting their actual balances. Since so many inventories are affected by open Repair Orders, you must make an effort to close these Repair Orders on a more timely basis. If the balance reflects vehicles that are complete and were delivered to the Customer, but the paper work (usually on Warranty or Internal work) is incomplete, start reviewing your open Repair Orders a few days before the close of the month. How many Repair Orders can you close before the last day of the month? Copyright All Rights Reserved. Reproduction For Any Reason Is Prohibited. Profit Blueprints, LLC

55 Profit Blueprints Right Now Solutions A1 LABOR ADJUSTMENT ACCOUNT HIGH WORK/LABOR-IN-PROCESS INVENTORY If the balance reflects vehicles that are complete, but were not delivered to the Customers, here are some of the questions you need to consider: How long has it been since the vehicle was finished? Did you notify the Customer in time for him/her to pick up the vehicle before the end of the month, or is the Customer taking his/her time to pick up the vehicle? Are vehicles taking too long to repair? Look at aged open Repair Orders and determine why they are aged. Is it Parts availability? Waiting for authorization? Poor scheduling? How much time should you pay to the Technicians, Body Men, and Painters on unfinished work? Are they being paid more time than they have completed on the vehicle? How do you determine how much time to advance a tech on an incomplete job? Is it consistent with the progress on the job? Are you too generous about advancing time? Copyright All Rights Reserved. Reproduction For Any Reason Is Prohibited. Profit Blueprints, LLC