In a previous column on understanding the true cost of a technician, I mentioned that an important consideration when looking at gross profit on labor is whether you are looking a “loaded” or “unloaded” profit and loss statement. Here’s why this matters.
There are two ways to have your company’s financial reporting. A loaded profit and loss statement means that all of your employee benefits are above the gross profit line. An unloaded profit and loss statement has all those benefits below the gross profit line. For example, on a loaded profit and loss your workers’ compensation costs, your vacation pay, your state and federal unemployment taxes, and your health insurance would all be above the gross profit line.
So why is this important? If you’re benchmarking your financials against some type of data that you see in an industry publication or hear in a seminar, or if you belong to a 20 group, you want to make sure you're not freaking out if you see that your data is different than someone else's — like if their business uses an unloaded profit and loss statement and you use a loaded P&L.
I know that in our company’s Spartan 300 program, all our participating shops compare financial data using unloaded profit and loss statements. I believe that’s the case for other 20 groups and in some paint company programs, but there may be some groups that use loaded P&Ls.
So, if you had a shop that was looking at total gross profit on an unloaded P&L, you would probably see their gross profit is about 45% to 50%. But if you’re looking at a loaded profit and loss, where the cost of benefits is above the gross profit line, then you might see that shop’s gross profit is only 36% to 40%. If that was your shop, you might start thinking, “I’m not making as much money as these other shops,” but it’s only because you are comparing apples to oranges.
What holds true for total gross profit is true for labor gross profit as well. You might have one shop that's looking at their labor unloaded and they're making 63% gross profit, compared to a shop that's looking at their labor loaded and might only be at a 38% or 40% gross profit.
Now I’m not here to say whether using either the loaded or unloaded methodology is right or wrong. Either way is okay as long as you understand it. And some people will disagree with me when I say this, but we prefer to look at profit and loss statements unloaded. Here’s why.
If I were to do a monthly review of my financials, I would expect my gross profit on labor to be pretty consistent. Let's say for example, that I was paying my technician $25 an hour flat rate, and my labor rate was $50 an hour, then my gross profit should consistently be 50% every single month.
But if I load my benefits into that, and one employee’s health insurance is more than another because the one has two children, then my gross profit is less likely to be consistent month to month, making it harder to review my financials for errors (such as a payroll processing issue, or overpayment of a technician) or to build a budget.
So, I would argue that it’s more challenging when you’re using a loaded profit and loss statement to troubleshoot your labor gross profit when it doesn’t look accurate. I'm not saying it's impossible, but I am convinced it will be much more difficult.
Mike Anderson