Management Basics Part 4 - Looking for Savings, Doing the Math

By Gary Hart

At the conclusion of our discussion last time, getting what you pay for, we ended with a net profit of $10,000 based on 100 claims processed through our fictional network called Linksafe. Now we need to take the other costs involved in processing these claims and apply them to the net profit.

First, you need to account for every item that is required to complete the work on the claim that is not parts, materials or labor. These costs will include items such as business and auto insurance, rent or lease of office space, advertising and vehicle expenses. Once you have these added up, this number will represent your total liabilities. Now things get easy because all you have to do is apply your liabilities to your initial net profit to get your "true net" profit.

Let's take a look at a typical liabilities example:

Rent $2,400.00 (Includes electric, water, etc.)
Telephone $500.00
Insurance $700.00
Advertising $1,500.00 (Yellow Pages and newspaper)
Vehicle Lease $800.00 (Two trucks)
Vehicle Costs $600.00 (Gas, oil, tires and general maintenance)
Tools $500.00 (Based on $6,000 per year in new/replacement tools)
POS/Computer $300.00
EDI $100.00
Payroll Burden $1,000.00 (Payroll taxes, etc.)
Office Supplies $100.00
Liabilities ($8,500.00)
Net Profit $10,000.00
True Net Profit $1,500.00

I am sure that you probably have more liabilities than I included in this example; however, you can see how slim your profit margin may be. In most cases, you may find that you are actually losing money, especially once you add in office support staff such as a receptionist/billing person. At this point, you hope that your non-insurance or repair jobs make up the deficit and get you back in the black.

Now things may seem bleak and, at the very least, this example should be a wake-up call for those of you who are not running financial management reports and monitoring your costs.

Let's take a look at how we can stretch the margins in our favor. The first place to look for savings is in your own operations. For example, you may be able to save $100 or more by eliminating EDI fees. Make sure you are getting everything out of your current POS system that you have been promised, because this is where all of your financial information is created and maintained.

The next area to look at is your insurance costs. To get the most from your insurance, contact your agent or insurance company every six months and re-price your policies. It is helpful to shop your policies around before calling your current insurer and then present the agent with the lower findings, if any. You can also look to other areas such as combining your high-speed Internet and phone services and eliminating faxing in lieu of e-mail and Internet faxing. If you sharpen your pencil in these areas, you can save an average of $500 to $750 per month, which averages out to an additional $5 to $7.50 per claim. This amount may not seem like a lot but if you take that over 12 months you are earning an extra $6,000 to $9,000.

In your quest to stretch your profit margin, the next area to look at is discounts from your distribution sources. While most distributors discount on volume, it is possible to get them to discount on loyalty. Here you will have less control and likely will see smaller savings than in your operations. If you can get your distributor to shave $3 to $5 off each part order, you'll save another $3,600 to $6,000 per year.

The last and least likely place to find savings for your bottom-line is with the network for which you perform work. About the only thing you can do for savings with a network is to never, and I repeat never, fax an invoice. If you haven't noticed, faxing a network a single invoice will cost upwards of $10, which is 27 times the cost of a first class stamp. In my experience with shops of all sizes, I have found that one in ten invoices is transmitted via fax. In our example, eliminating these faxed invoices would save $100 per month.

So let's recap, with very little work and more attention to the detail, we can save $9,700 to $15,100 per year dramatically changing our true net profit. This money can be used to expand operations, remodel, pay dividends or, more importantly, be available for a rainy day.

We have covered a lot of ground here; however, the one lesson you should take away with you is the need to pay attention to the details and spend the time to manage your business. By using basic financial reports, managing your vendor relationships and striving to save in every area of your operations, you can close the financial loss gap and get back in the black.

Now we are ready to take our first steps. Next time we are going to take all of the lessons and examples from previous Management Basics and create effective short and long-term goals that can be applied to any AGRR shop, small or large.

Gary Hart is CEO of eDirectGlass.

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