Wednesday, June 8, 2016

June 2016: Gross Profit: "A State Of Mind"

Many of us have heard this term before as to gross profit being just a "state of mind"...but what does it really mean, or even better....what does it imply?

In my opinion, this simple phrase of gross profit being a "state of mind" has always been just that...a mindset and a thought process that has always led me to "predictable and desired results" each month throughout my career.

Even though there have been times when the results were  not so desirable, or predictable, just having that "state of mind", the predictable and desired results far outweighed the few times that they were not achieved.

We could also carry this "mindset" into our sales and net profit categories as well and not just the gross profit "state of mind".

For example, in order to remain competitive, sales prices may have to be reduced, sacrificing the gross percentage in order to gain higher overall gross amounts. After all, we really can't spend a percentage, but we can spend overall gross dollars.

Quite simply, I would much rather have a parts gross of 35% of $100,000.00 as opposed to 45% of $50,000.00. Volume sometimes will send us into a gross "state of mind" leaning towards volume as opposed to the appropriate gross retention percentage.

I would prefer both of course, but that may not always be the case in certain circumstances.

Another example in parts would be accepting a much lower gross, or perhaps even "no gross" up front on the sale in order to gain the "back end" gross from volume purchase discounts and achieving overall sales goals....much like in the "front end" sales departments.

As a matter of fact, having a gross "state of mind" is very evident in the front end sales departments, especially with used vehicle sales.

Most used vehicle sales prices are usually priced "cost up", meaning whatever the cost of the unit is, along with reconditioning costs will ultimately be the determining factor of what the unit ultimately sells for.

This is not unusual, or even uncommon as the sales department also has their own guidelines as to average gross per vehicle, both "front and back". This is why the term "MSRP", (Manufacturers' "Suggested" Retail Price) is a common term today and not just in our business.

The Manufacturers Suggested Retail Price, (MSRP) is basically available to set guidelines for the consumer to shop and compare.

Living in a "free market" environment and economy allows competition to play up to it's potential and ultimately, better consumer prices and better products. To me, this is why, still to this day, people are always shopping for the "best deal", in all retail environments.

We also feel this gross "state of mind" in our Service Departments as well with overall labor gross percentages versus overall labor gross. Once again...would you prefer an overall gross percentage of 68% of $100,000.00, or 75% overall gross percentage of $50,000.00?...same "state of mind" applies.

Once again, I would prefer both and have always been a "goals & guidelines" type of manager, but we still have to keep things in perspective. We also have to have reasons for everything we do and having a true understanding always precedes the particular "state of mind".

We also have to be careful not to fool or confuse ourselves in our accounting practices as well. A good example of what I'm referring to was a recent question and comment that I received from one my customers concerning overall labor gross profit.

This particular dealer was very happy with his customer, warranty and internal labor gross percentages, which was well over guide in the the mid-70% range, but he didn't understand why his "overall" gross percentage was in the low-60% range.

I explained to him that there's this little thing, or account called "adjusted cost of labor" that was way out of control and even though the initial percentages were great.

Unapplied time, straight time technicians, tech incentives, guarantees, etc. were taking a big toll on his "desired result" area, which is of course, overall labor gross dollars.

In my opinion, any amount paid technicians, other than vacations, benefits, etc. should be considered a "cost of labor" and should be accounted as such. Whatever the gross comes in at is a real number and a real percentage.

If the gross attainment percentages or levels fall short of guide or "desired and predictable" levels?....then we fix it.

Adjustments or modifications may need to be made in overall service pricing such as competitive labor versus maintenance and captive, repair labor. Maybe dispatching is an issue or even the right mix of tech skill levels have to be addressed.

The most important thing is that we don't hide these things from ourselves just to make it "appear" to look better than it actually is.

It's also very difficult achieve "predictable and desired" results when we are not honest with ourselves, or perhaps we just didn't know to, in this case, have the proper accounting practices in place that can be measured accurately.

There are also many areas and accounts in the dealers' financial that is subject to not only personal preference, but also scrutiny and questions as to what is an expense versus a cost of goods or labor.

Should a straight time technician's "unapplied time" be expended in Service "Other Salary & Wages?"...or perhaps "Adjusted Cost of Labor?"...or lastly, the "Cost of Labor" account?...

If a clock hour tech works 40 hours and only produces 20 hours?....where does the time go? How is it accounted for? This is where just by having all these different options leads to different opinions and different results on various dealer financial statements.

This is where everyone is right and everyone is wrong, depending on the dealer, manufacturer or office manager.

Having the right "state of mind" also has to be communicated and understood by everyone as one "state of mind" for the group, team or dealership department. Everyone has to be on the same page, with the same goals and guidelines that can be measured.

Also, by having a unified "state of mind", everyone understands the numbers and percentages that these goals and guidelines represent and set for to begin with. Ultimately, this better understanding and honesty leads to hitting those "predictable and desired" results more often than not.

"Having the proper "state of mind" on gross profit isn't anything new for most of us...the real question is...what's your expectation?...because it's your "expectation" that ultimately determines your "state of mind"....

Dave Piecuch is the Vice President of Automotive Consultants Group Inc. and is the Head Coach for Smart PartsTMThe only "Results Based" High Return Training, Coaching, and Consulting company in the world!  Dave can be reached at Cell 786-521-1720 or E-mail at Vist our Website at