Management Matters
Controlling the Cost Levers, Part 3
By Thomas M Langer, Jr.

So far we’ve looked at the levers for marketing and pricing. In this article we’ll tackle the third leg of the profit stool, costs. While many have said to me that there is no way to control costs. Insurance costs what it costs right along with parts and utilities. And one must be diligent about paying wages high enough to attract and keep great talent. Well, needless to say, if I agreed with this statement, I wouldn’t bother to write this article!

There are many ways to lower your costs this year. And, as we all know, $1 saved is $1 straight to the gross margin line. Too bad we have to pay taxes, but that’s another article! Anyway, we’ll take a look at proven strategies and tactics employed by your fellow shop owners who have proven successful in lowering their costs:

Analyze your profitability compared to others: Related to our first article in this series, the first step in this process is measurement. Take a few minutes and look at the various reporting services that are able to provide you with typical cost and margin factors for auto repair shops. Maybe you’re already far better. Or maybe there’s some room for improvement. If you need a hand, a great source will be your accountant and/or banker.

Develop a cost-cutting goal: Knowing where you rank, and understanding your goal is to do better than the average, set your margin, price increase and cost decrease goals. As we always learn, make it specific, measurable and understandable. One example from a shop: “Reduce our cost of operations by 2% a year while increasing revenue 3% per year.”

Enlist the troops: If your crew doesn’t know what you’re trying to achieve, and you don’t have a way to include them, cutting costs will be very difficult indeed. Remember, your team may see this as a threat to them. One way to avoid this is to include them in the goal in a meaningful way. For example, offer a $25 restaurant or fuel gift card once a month for the best cost-cutting idea. And consider a bonus system where the shop employees receive a percentage of every dollar saved. One shop I know splits the savings (adjusted for taxes). Their approach is along the lines that I would rather get help and save something than get 100% of nothing. Keep a scorecard in the employee washroom, in the shop away from customer eyes or wherever. Just don’t forget it and skip the update or your employees will take it as a sign that your goal isn’t really serious. And make a big deal out of announcing bonuses, gift cards, etc.

Manage inventory: While most owners know what they’ve spent to buy “stuff,” they rarely ever really know their actual investment and what’s falling through the cracks. For examples, how many parts do you have right now, including cores that should have been returned already? How many shop supplies such as chemicals are lost due to careless use and storage? How many parts do you have hanging in cabinets on the walls? These are all lost dollars, lost useful space and a source of enhanced cash flow and margin.

One way to save some money and possibly time, but not space, is to work with your local parts source to put parts in on consignment. This serves two purposes. First, you pay when you use. Maybe more important, it has the part source responsible for inventory levels assuring you don’t have a bunch of obsoletes hanging around, and you don’t have technicians standing and waiting for parts while the vehicle sits and ties up profitable bay time. These programs still exist, so ask.

Review insurance plan designs: After many, many years of reviewing insurance documents and plans for shops, I have come to realize that they tend to need attention in three areas. These include the total value of vehicles held at any one time (tend to be too low), the coverage may not cover all of the shop’s activities such as towing if appropriate, or cover too many that no longer or never have existed. Finally, deductibles tend to run too low, liability limits too low. Call your insurance pro and ask for a complete review with less-expensive alternatives. These could be plan-design changes or different insurance companies altogether. Let your agent know that you want to make sure your coverage is adequate, but you are targeting a 5% (or whatever) savings for the coming year.

Audit your assets for appropriate insurance levels: As noted, insurance coverage tends to be off in the area of vehicle value. Consider for a moment if there were a fire with a total shop loss, including every customer’s car in and directly around the building. Your customer’s vehicle insurance companies are going to come looking for reimbursement. If it’s not properly insured, they may come looking to you! In addition, assure you are adequately covering your cash on hand, tools and equipment, computers and the rest. On one hand, getting this squared away may cost a few extra bucks. But, done in concert with other changes as noted above, it may still save some money.

Establish a bill-paying system: Take the discounts for early, if none, late as possible.

Maximize money in the bank with interest bearing accounts: If your money is sitting in non-interest-bearing accounts, or you are carrying high balances in checking with no reason, talk to your banker about how you can put the money to work for you. I will grant you, my last statement showed an interest of a whopping 0.10%, but it is still higher than none at all. Keep in your active accounts just those operating dollars you need for the next few months.

Stay connected to your accountant and banker: I have had people say that it just costs them money to talk with their banker or accountant. I will share a lesson I learned from a very wise business owner early on in my career. I set up standing appointments with both of these key people every three months. During these meetings we would discuss new programs, tax changes, law changes, accounts, P&L and more. There is no doubt that these visits (and I bought the breakfast) saved me far more money than I could imagine. And it made tax time infinitely easier. This is a win-win deal.

Invoice promptly: It is no exaggeration to report that I know one business owner who had great sales, worked hard, had lots of happy customers and went bankrupt doing it! The simple reason, he sat on invoices. Being great and not being paid don’t mix. This guy lost his house and everything since it was all pledged to the collateral. The banker and accountant were in shock. Looking at what should have been his receivables, he would have plenty of money. Only he never asked the customer to pay with an invoice. His books weren’t an average of 45 or 60 days out. Rather, they were many months and in more than one case, years in arrears. So, if you extend a fleet or customer credit, get paid!

No credit for others unless worthwhile: Related to above. Let’s face it, as business owners, we’re all really nice people who more often than not want to extend a break to someone. Just make sure it makes sense. If someone can’t pay today, what’s likely to change 60 days from now? And will you or groceries be more important at that point? You get the idea. More than one business owner has “niced themselves” right out of business.

Control utility usage: Depending on your shop size, your utility expenses could be running between many hundreds to thousands of dollars every month. I will share a secret here. Around my house my boys still give me a hard time. They claim I would all but chase them around to turn off lights, keep the fridge door closed, and keep the outside doors closed and more. Maybe you are the same. So, why is it we’re Attila the Hun at home, but pay little or no attention at the shop? Some ideas from shops that have been successful at lowering their utility expenses:
• Have a process to open and close the bay doors as appropriate. Ever notice that we’re quick to put them up and back down in the cold, but our team may think they need to heat the entire outdoors? Have one person get the vehicle and another open and close the door quickly.
• Look at the thermostat, especially in the shop. True, you can’t turn it down until people turn blue. But, for every degree down, you save about 3% on your heat, or A/C the other way.
• Watch water. It’s a double whammy in many areas. Because they count it coming out, assume it is going to go back down the drain in one form or another. Many a day I have walked past someone letting a hose or faucet run just because it was easier than shutting it off.
• Look at new lighting technology. I am told LED can save a bundle. Check it out.
Anyway, you get the idea.

Double up, partner for expenses: If you have a fellow retailer or office next door, the neighbor may be open to participating in a joint marketing campaign and splitting the expense. You both win and your marketing budget gets slashed by 50%. One shop partnered with an ice cream parlor next door. Come to the shop for work and head next door with your coupon for a half-price ice cream cone. And both businesses added these folks to their mailing lists and provided a frequent-customer card. One free oil change for every dozen, one free cone for every 10. You are limited only by your imagination. It can be a lot of fun too!

Combine advertising with invoices & service reminders: Never let a piece of mail or a newsletter get mailed without adding some type of additional special, announcing a new service, a new technician, enhancements to your website, whatever.

Use a business analytics program specializing in auto: As we said at first, if you can’t measure it and don’t know, you cannot fix it!

Consider migrating IT to the cloud: This is a change we made, and it has worked really well. Our equipment became much simpler (read that as less expensive, and not obsolete every 90 days) and for about $200 a month, all of our files and info went off in the clouds to a server managed by our IT provider. As a result, our headaches are now theirs, and we have had a fraction of issues and downtime with virtually no loss in speed. It took them a while to convince me; now I wish I had done long before.

The bottom line in controlling costs is a simple equation:
((AWARENESS+MEASURMENT) x PLAN) + CREATIVITY
This calculation will result in a lot of savings and more dollars straight to your pocket. Have fun with this!

Thomas M. Langer Jr. has a career spanning a lifetime in the industry and is combining this experience with new information to provide readers of Undercar Digest with information you need to build a better business!