Analysis: Understanding key financial metrics that drive shop success
Success hinges on a deep understanding of financial health in an industry as dynamic as automotive services. This involves looking at various metrics to derive actionable insights about the business’s ability to meet its current and future obligations.
Knowing what indicators to track and what they mean is critical to making informed business decisions.
These are the most crucial financial signals to monitor in auto servicing for enhanced business profitability and operational efficiency.
Revenue: Service shops’ revenues generally span three primary sources: Labour, parts and add-ons. The average repair order (ARO) is one of the best metrics for tracking these figures from a single viewpoint. This indicator represents the dollar amount of services and products sold over a specified period. Industry data shows the average ARO was just over $470 in 2021, with the Pacific West and Northeastern regions recording the highest figures.
Closely related to the ARO is the hours per repair order (HRO), which measures the technicians’ average time per repair or service order. Calculate it by dividing the hours worked in a week by the number of repair orders in that period. Experts recommend following the HRO rule of three — a technician should complete three service orders within three billable hours in one shift.
Cost of goods sold (COGS): COGS is the cost of doing business. In the auto service context, it includes primary expenses incurred in purchasing parts necessary for repairs and supplies expenditures for consumables, such as oil and fluids.
Analyzing COGS helps determine how much business revenue goes to direct costs. For example, if a shop generates $100,000 in revenue but incurs $40,000 in COGS, 40% of the income is spent on parts and supplies. The goal is to keep the value low while maintaining output quality.
Gross profit: Gross profit is calculated as revenue minus COGS and is a critical metric for assessing financial performance. This margin indicates how well the auto shop converts sales into earnings before accounting for operating expenses.
Improving gross profit margins often involves optimizing supplier relationships to reduce parts costs and implementing effective labour pricing to reflect the service value offered. These measures lead to greater financial stability, allowing the company more flexibility in adapting to industry changes.
Operating expenses: This includes all costs related to running the business that are not directly tied to COGS. Key components include rent and utilities, wages, marketing costs, insurance and other relevant day-to-day obligations.
Operating expense issues represent one of the biggest reasons that 45 per cent of businesses fail in the first five years. When a company struggles to meet current expenditures necessary to enable production, everything else suffers, from labour and inventory to cash flow.
Net income: Calculate net income or profit by deducting all expenses from total revenue. This indicator reflects the business’s overall profitability over time. It also represents the portion the company can afford to reinvest to sustain growth and competitiveness. The Automotive Industries Association of Canada has pegged the average net income between 6.3% and 8.8 % yearly. That means anything above this is a strong sign that the service is doing well.
Customer acquisition cost (CAC): CAC measures the cost associated with acquiring a new customer. This metric includes marketing expenses divided by the number of new customers gained during a specific period.
Auto service providers must prepare for a new class of customers as autonomous vehicles become more prevalent, which will impact CAC moving forward. For example, diagnosing and repairing driverless cars will require advanced knowledge of interconnected automation systems, which often necessitates additional spending on training programs.
Customer lifetime value (CLTV): CLTV estimates the total revenue expected from a customer over their entire relationship with the business. Failing to retain clients after the first few repair or replacement orders can signify dissatisfaction with the service rendered or a failure of the company’s retention strategy.
Understanding what these metrics mean is the key to making data-backed decisions. Many financial system tools offer simple dashboards with streamlined commands for generating indicator reports based on operations data.
These insights are vital for comparing performance against set benchmarks. For example, a decrease in ARO could indicate reduced upselling or longer service times, prompting management to investigate those specific areas instead of wasting resources on general audits.
Financial metrics empower managers to make the best decisions to drive success and profitability. Relying on these signals rather than mindlessly implementing broad or misplaced strategies reduces inefficiencies and promotes agility in an evolving business landscape.
Devin Partida is the editor-in-chief of ReHack.com and a freelance writer. Devin covers business technology, Fintech and auto tech
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