"Forecasting Service Net" - #7 Expenses

There are seven things you control that directly influence your Service bottom line.

    1    Calendar Utilization
    2    Daily Clock Hours
    3    Number of Technicians
    4    Proficiency
    5    Effective Labor Rate
    6    Gross Retention Rate
    7    Expenses

This installment deals with Expenses.

The most understood controllable is Expenses.  To begin with, all of us deal with the reality of expenses in our personal lives. If we don’t spend as much as we bring in there is money left over to save or enjoy. If you are a manager in a service business you also deal with it at work.  How many of us have had a banner month in the works, high repair order count plus high hours per repair order plus high effective labor rate, only to find out that final expenses ate up all the gross profit and we were left with nothing. Early in my career I remember closing each month and then waiting anxiously for the office to post final expenses so I would know if we made money or not.  If we did, I would be very happy.  If we didn’t, somehow that was the office manager’s or store owner’s evil plan.  The next month, it would be the same thing all over again.  

One thing that is absolutely true is that every dollar of expense equals one less dollar of net profit. Let’s say you have a well run service shop that retains about 15% of sales as net profit.  This store needs to have close to $7 of sales to cover every $1 of expense you incur.  If you have $18,000 in expenses you need to have $120,000 in sales!  So ask yourself is it easier to save a dollar or sell seven to cover it? That being said, you must spend money to make money.  The key is knowing what to spend, what the return will be and how long it will take to get the return. Broadly speaking there are four types of expense. Some have a return, some don’t.  Some you do to earn more, others you do because they support who you are or your store mission. Don’t treat them all the same.
  

1. One-time expense is once and done.  If you make a mistake you only pay for it once. 
2. Tracking expense is variable and increases or decreases with sales like supplies or certain incentives. Negotiate or eliminate these to decrease the % of sales they consume.
3. Fixed expense doesn’t change or changes little. Things like rent, heat, electric.  Be vigilant about supplier pricing and price increases over time.
4. I am stuck with this damn expense forever and can’t turn it off.  Be very wary of taking on any expense that involves a long-term contract. Like personal credit card debt, you pay forever regardless of your income. When business turns down you need to be able shed expense.

What to do.  Don’t wait till the end of the month to look at expenses. Look at them before you incur them. Use the numbers worksheet to help you make decisions by forecasting their impact on your bottom line. The following story is a simple example. I was running a shop with 10 technicians. I observed that every technician spent time wandering the lot, finding their next job.  I wanted to paint lines and number each spot. One glance at the key tag and the tech would know exactly where to find their next job.  I began to time it. About 3 minutes were being lost per job x 5 average jobs a day = 15 minutes per tech per day or 2.5hrs for the shop. Having this time to work on jobs would translate into a 3% bump in Productivity.  Plugging that number into the spreadsheet increases the monthly net profit forecast by $2,200, more than enough to pay the one-time $1,200 the painter wanted to do the job. I knew before I spent the money that we would retire the expense in about 2 weeks and net an addition $1000 in the first month. After that all the additional sales would go right to the bottom line for a total of around $25,000 a year. I knew the return and the timeframe. Other expenses like a company picnic may not have a direct return or payback. Plug that expense into the worksheet prior to incurring it to see your adjusted net forecast. If you need to generate more gross profit to cover that expense, look for realistic opportunities to improve one of the other controllables.  A simple and minor change may do it. 

Next: How to execute your plan - 4DX and Wildly Important Goals.

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