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Six Ways to Lose Money in the Service


This is an actual comparison numbers from financial statements to

show you how they can significantly increase or decrease the
bottom line (net profit) of the service operation.

1. Gross Profit on Customer Pay (Cash) Labour.

a. The goal is a minimum of 68% profit: if the service
department produces for example $100,000/month (CP
Labour) after paying the technician the first split of the
dollar represent $68,000. If for example your service
department is operating with a gross profit of 64% the
would therefore be working with a minus of $4000 for
the month

2. Customer Pay Parts to Labour Ratio.

a. The goal here is to maintain a minimum of 80%parts
sales to labour ratio. Therefore if we were to operate
on $100,000 in labour then we should generate $80,000
in parts sales. If you are operating at a ratio of 65%
then you just gave up $15,000 in lost revenue.

3. Personnel Expense as a % of Gross Profit.

a. The expected result for personnel expense is to
maintain a worst scenario of 50%. They most profitable
retailers run around 42%. However a number of service
departments have managed to let this number creep up
to around 53%. The difference then between a retailer
at 48% ($32,640) and at retailer at 53% ($36,040) is
$3400. I hope that you are keeping score!

4. Shop Supplies or Other Supplies

a. This number should never exceed 2% of your gross
profit. So at $68,000 we would incur and expense of
$1360. Very often we will find retailers that operate in
excess of 4.5% and higher. This would translate into
$3060 per month or a difference of $1700 per month.

5. Shop Policy Work

a. Shop policy is just another cost of doing business and if
its running at a 2% of the gross profit or less or as in
this example $1360, then why get concerned? Well, if it
is running (like it does in a large number of retailers) at
around 5% ($3400) and therefore taking an extra
$2040 of your net profit it becomes a concern.

6. Average Units (hours) per Repair Order

a. This is one of if not the most critical measurements in
the service department anywhere in the world. The
accepted goal is 1.5 units per repair order. For this
example we will use 700 customer pay job cards. 700
RO’s X 1.5 units = 1050. If we have a door rate of $70
we would produce $73,500. The same store running at
an average of 1.2 units per order would only produce
$58,800. That is a rather large number of $14,700 per
month, oh yes almost forgot my 80% loss in parts sale
which is another $11,760.

It is through good management techniques that we control
our department’s financial well being. However, we can never
lose sight of the fact that pennies add up to dollars. In just six
accounts we have lost the opportunity to generate another
$52,600 per month. That is a very handsome annual total of
$631,200. These numbers are based on a retailer with a shop
that consisted of 8-10 service bays imagine the results of a much
larger shop. As a manager we must continually monitor where
our money goes and measure it against benchmarks. It is easy
to let these controls slip away which is why we must constantly
look at generated reports and financial statements in order to
assist us in managing a profitable department.