• Identify opportunities or direction for growth,
• Identify general trends in the overall performance of the business,
• Measure if changes in the business have had a positive impact on the profitability.
In order to capture the right information it is assumed that you are individually job costing either manually or by utilizing a management system. The financial structure of the job costing can vary but in general if you sell something there should be a corresponding cost associated with it and the general categories are: Metal Labor Sales/Costs, Paint Labor Sales/Costs, Parts Sales/Costs, Materials Sales/Costs, Sublet Sales/Costs, and Other Sales/Costs for rental cars, Pop machine, coffee mug sales, etc.. This information is then compiled and all information pertaining to RO's that have been closed will be consolidated into the Income Statement. This comprises the Financial Information that we would use for our Financial Ratio Analysis. (Note: The adjustment of costs associated with RO's still open is called a Work In Process (WIP) adjustment) If you do not normally make a WIP adjustment for your monthly financial statement then ensure that you use at least a 6 month interval of financial information (or longer) for analysis purposes. Most of the Managerial Information just involves determining square footage, counting the number of employees, how many hours that they work, knowing how many cars were repaired and determining how many spray booths you have. When you compare this Managerial data to the Financial Information captured above you are able to calculate your Managerial Ratios.
Work In Process adjustment (W.I.P.)
The purpose for this adjustment is to stabilize the GP margins for each month so that small negative changes in individual department profitability are quickly identified before they can cost too much or changes that resulted in increases in profitability are identified quickly enough to be capitalized on and perhaps repeated or made even more effective. The adjustment is made by reducing the department costs by the cost amounts associated with all of the incomplete or still open RO's at month end. In essence you are identifying the amount of in-process inventory that exists in each department. The simplest method to describe this is to use the Parts Department as the example:
This would be repeated for each department to provide an accurate representation of the Gross Profit performance for each department. The materials adjustment is made by doing a physical inventory valuation at month end.
To ensure that we calculate ratios that are meaningful it is important to acknowledge that some people track the very same things in different ways. For instance, some track labor profitability (Gross Profit on Labor) by the difference between what they collect in labor sales and what they pay out in wages to the labor that produced the sales. While this may be considered correct from a financial standpoint, from a managerial perspective it does not represent ALL of the costs that are associated with the labor resource. To achieve a true hourly department cost of labor we must also include: vacation costs, FUTA, SUTA, Unemployment, Group Insurance costs, production labor incentives or benefit costs or any other costs that might vary with the addition of more production labor personnel. This is just one example but it is important to illustrate that just because someone indicates that they achieve 69% Gross Profit on Labor does not mean that they are calculating the GP% the same way that you would. Interfirm comparison of numbers can be very beneficial when financials are audited and represented in a standard format such as in an Industry Performance group like our Acoat®selected program and our new regional performance Groups. For those that are not having their financials audited for comparison purposes, that comparison needs to be critically evaluated for relevance with the best comparison falling back to comparing against your own history.
At a minimum you should know the GP ratios for all of the general Sales categories. The formula to calculate this is generally:
Another Financial ratio that can be used both for Budgeting, Breakeven and Capacity analysis is the department Sales Mix. The formula to calculate department Sales Mix is:
• Metal Labor GP%
• Paint Labor GP%
• New Parts GP%
• Used Parts GP%
• Aftermarket Parts GP%
• Materials GP%
• Sublet GP%
• Departmental Sales Mix %
• Overall Gross Profit %
• Net Income % (Most Valued!!!!)
To keep you busy until the next issue I will identify some of the key Management Ratios we use to evaluate Facility Effectiveness. The hope is that you will begin calculating these ratios for your business on an ongoing basis.
• Sales per Square Foot
• Sales per Production Square Foot
• Sales per Stall
• Sales per Non-Production Employees
• Sales per Production Employee
• Sales per Estimator
• Sales per Hour Sold
• Metal Labor Efficiency %
• Paint Labor Efficiency %
• Balance of Staff
• Gross Profit Dollars per Hour Worked
• Cycle Time (Hours/Car Day on-site)
• Comeback Ratio or CSI
• Paint Expense/Paint Hour Produced