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CARS™ CALCULATES
THE MATH OF FIXED OPERATIONS
CARS™ Calculates
I remember like it was yesterday, trying to learn how to be a consultant. The math was the hardest part for me to learn. It just seemed SO abstract to me! But with a LOT of effort and hard work, we were able to pick up one calculation, then another, then another. And before I knew it, I was holding workshops on the financials of a service department.
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We recognize that this math can be very intimidating to many people. And, if you're anything like we are, you hate to ask for help! So, we built this section just for you! It's our totally free suite of fixed operations calculations! While we simply can't put ALL of the math on here, we did our best to put the most popular, most widely used calculations up for you. And we'll constantly be adding more.
So please feel free to visit often, and use these calculations with our compliments as much as you'd like. And remember, if you ever have any questions on the math or anything else for that matter, you're always welcome to give us a call!
Cost to Produce $1.00 in Labor Sales
Your cost to produce $1.00 in labor sales represents the ability of your service department to provide an acceptable return on the dealer's investment. To make it easy to visualize, think of it in these terms: Your dealer makes an investment each month in the expenses to run your department and the technician payroll (the total cost of sales). If you compare this investment to the total labor sales (or the return on that investment), you get the total investment as a percentage of the total return on investment. You're ideally looking for this number to be $0.80 to $0.90 or lower. To use banking terms, if your dealer were to take the total investment number above to the bank every month and invest it into some type of product, they would have an expectation to see a return on that investment. Hopefully that return on investment would be $0.10 to $0.20 on a dollar. If, at the end of the month, the bank sent a bill for 5% or 10% to the dealer for holding their money, they would likely go find a different bank or at least a different investment product. If you're cost to produce $1.00 in labor sales is higher than a dollar, then your service department is similar to the bank that is charging the dealer to hold their money. But with some work and restructuring, you can most likely get it in line. The best and most profitable stores work hard to always provide this return on investment to their dealer. If you need some advice in getting this number to a more acceptable level, give us a call at (570) 455-CARS. We are always here to help you!
Work Days in a Month
As I speak with Service Managers and Dealers alike, this seems to be an often misunderstood number. The number of workdays scheduled in any given month, is an important element of your overall service department financials. This is a calculation that you can use if you are looking at a Saturday strategy and want to know it's impact on your projected financials.
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Simply enter the data requested, and the calculator will display the total number of work days for the given month based upon your data. Saturdays are displayed as the mathematical equivalent as a full work day. So, in the default display, the number of M-F days are 21 and the calculated number of days are 22.2. What this is saying is that the Saturday strategy is the mathematical equivalent as having all technicians work 1.2 full days that month.
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Your technician attendance percentage is a commonly overlooked element. But it has a tremendous impact on your labor sales. Every time a technician is absent, your labor sales will go down to a degree due to the lowered production capacity. Your technician attendance percentage is a way to gauge this loss of production. And it can be used in forecasting or during projections for improvement.
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Your CARS™ Consultant will normally use this calculation during any analysis or in-store activities. And will work with you and your staff on ways to improve it. For now, you can use the calculation to the right in this manner:
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Enter your Work Days: This would be the number of work days in the period you want to calculate the technician attendance percentage for. It is typically a one-month period.
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Enter your Number of Technicians: This of course is simply the number of technicians you employ. Be sure to include your hourly technicians in this calculation (assuming they produce labor sales as well).
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Enter your Schedule Vacation, Off-Site Training and Anticipated Sick Days: This is pretty self-explanatory. But you should include any days that technicians are scheduled to be off (and/or anticipated to be off) and out of store.
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Your result will be their expected attendance as a percentage of time scheduled. You can use this in your forecasting by multiplying your anticipated labor sales by this percentage to lower your sales based upon the anticipated technician time off.
Technician Attendance Percentage
This is one of the most important calculations you can make. Use this calculator to determine the sales and flat rate hours needed to retire your average monthly expenses. Or you can use it to determine what it would take to retire the expense of a new piece of equipment.
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Use this calculation to develop your strategy to retire that expense. For example, let's say you want to buy a new alignment checker machine for your service drive. Use the calculator to tell you how many hours it would take to retire that expense. If you divide that number by what the flat rate hours you charge for an alignment, you can see how many additional alignments would need to be sold in order to retire the expense.
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OR you can use the calculator to get your monthly break even point. If you enter your average monthly expenses and calculate the amount of flat rate hours that need to be sold to break even, you can then divide that by the days in a month to determine the number of flat rate hours per day that will put you on track to break even.
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This one is a powerful tool! Feel free to use it with our compliments! But as always, if you have any questions, just give us a shout!!
Sales Needed to Retire an Expense
This calculator is similar to the retire an expense calculation but with a twist. This one allows you to retire the expense AND produce a predetermined net profit percentage. You'll enter all the same data as in the previous calculator, but this time you'll also need a net profit percentage. That net will be a percentage of sales. So, essentially what you'll be calculating is the sales needed to retire the expense AND have enough additional sales left over to produce a net profit that's equivalent to a percentage of sales.
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Most people will typically look for 10% to 20% net to sales. This dovetails with the first calculator that calculates cost to produce $1.00. !0% net to sales would have a cost of $0.90 cents to produce $1.00. While 20% net to sales will have a cost of $0.80 to produce $1.00.
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You can use this calculator in the same sense as the sales to retire an expense. The only difference being, instead of breaking even, you'll be producing net! And that's what it's all about....Getting your bottom line in the Purple!!
Sales Needed to Produce Desired Net
Shop / Technician Proficiency
We could easily write a book on this subject alone. There is so much to talk about and so many moving parts to shop proficiency. But for now, we will just concentrate on the simple math.
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When you look at your shop (or individual technician) proficiency, you're looking at their ability to produce flat rate hours expressed as a percentage of their scheduled time in the store. It's that simple. If a technician is scheduled to work 8 hours and produces 10, he's considered to be 125% proficient (10 divided by 8).
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Again, you can use this calculator to look at your entire shop or just one technician or ideally BOTH! Try it today and you'll be well on your way to getting your bottom line back in the Purple!!
This is a GREAT indicator of the performance of the fixed operations departments. Essentially, it is designed to determine the ability of the fixed operations departments to cover the entire expenses of the dealership. Why would you want to do this? Well, it's actually pretty simple. The closer you get to being 100% absorbed (meaning that fixed operations can indeed cover all of the dealership expenses), the less dependent the dealership is on the variable departments to make a profit. This becomes important in the effort to sell new and used vehicles. As a sales manager, if you have to take a "skinny deal" to move a car OR if you wanted to develop a strategy to sell more vehicles at a lower profit margin, you are more able to do so when the fixed operations departments are covering the expenses of the dealership at a higher rate than a competitor who is not in such a favorable position.
Keep in mind that some manufacturers report this number with a twist. Some will report this not including any personnel expenses in the calculation. What that is designed to do is to level the playing field. A dealership near New York City will obviously have a larger personnel expense due to cost of living than one in rural Arkansas. By omitting personnel expense from the calculation, they are essentially removing a large part of geographic advantages/disadvantages from the equation and are thus better positioned to compare dealerships to each other in this area of performance. For the purposes of OUR calculation, we will leave all expenses in. This will allow you to see your TRUE fixed absorption number.
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The New Car Burden calculation puts a quantifiable number of dollars burden on every new vehicle sold. This number represents the unabsorbed overhead spread across all new vehicle sales. Considering that, in today's competitive market, profit per new vehicle is at all time lows, it's extremely important for the fixed operations to participate as much as possible to allow for the competitive pricing of new vehicles. The pay off back to fixed operations is simple. Those new vehicle sales will in large part become service customers in 6 to 10 months. And this snowballs quickly. The better fixed operations absorbs, the more new vehicles get sold, the more customers that get back to service, the more profitable they become and the more they absorb expenses, and the cycle begins again!
Fixed Absorption / New Car Burden
As a former Parts Manager, the math of the Parts Department is always near and dear to my heart. And this is one of my very favorite calculations! It's also one of the most widely misunderstood. The calculator was designed to illustrate the difference between markup factor and gross profit percentage.
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Many Parts Managers will use a "cost plus" calculation to determine sell price. But you must be careful. As you can see from the default views, if you use a markup factor of 140% (or cost plus 40) you're NOT generating a 40% gross profit margin! In fact, if you do the math (Wait! We've already done that for you!) you'll see that it only generates 28.6% gross profit.
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We've also built a top half to the calculator that will generate a markup factor for you if you just enter your desired gross profit percentage. You'll be able to see in the default view that in order to generate 40% gross profit margin, your markup factor actually needs to be 166.7%.
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We hope these are a help to you and that you can use them in developing your pricing strategies. But as always, if you have any questions or suggestions, don't hesitate to give us a call or shoot us an email.
Markup Factor versus Gross Profit Percentage
