Proudly serving the industry for which it was named for more than 50 years, Outdoor Power Equipment provides dealers who sell and service outdoor power equipment with valuable information to succeed in a competitive market.
Issue link: http://read.dmtmag.com/i/78196
FEATURE STORY By Jim Yount OF APPLIED HARD COST OF DOING BUSINESS Fourth article in a series T he first step in turning the service department into a stand-alone profit center is to understand the department's responsibility for paying its fair share of total company operating expenses. The department will no longer have a free ride. We label these expenses as hard cost. Examples of hard cost include rent/lease, electricity, telephone, maintenance, heating, cooling, taxes and insurance. In addition to obvious expenses, the department must consider what it cost to properly equip and provide special tooling required to operate efficiently (e.g. work stations, benches, lifts, grinders, air compressors and cleaning station). We would never establish a selling price for a piece of equipment without first knowing its cost. Why would we establish an hourly labor rate without first determining the cost to provide technical service to the customer? Increasing Shop Profitability (Part IV): DETERMINING SERVICE DEPARTMENT'S SHARE We have provided a rather simple formula to assist with identifying the department's share of operating expenses. Following the step-by-step formula, you will be asked to identify certain costs and then transfer the numbers to the spaces provided. These numbers will be used to calculate ratios and other values. Numbers provide meaningful information required for establishing a fair market hourly shop labor rate. Your shop's hourly labor rate must be fair market value. The hourly labor rate must generate equitable profits for the company. Beginning now, with a profit-centered mindset, we'll show you how to develop a fair and equitable hourly labor rate for your service department. For the purpose of this mathematical exercise, we will use our copy of a dealer's Schedule of Operating Expenses — Model, typical of a dealer with annual sales of $1.5 million. These ratios would change very little for dealers with annual sales of $5 million or $6 million. You'll need to retrieve a copy of last year's balance sheet and income statement. Take two or three minutes to review your statement. Using your last year's statement as a reference, we will begin with numbers from our model of operating expenses. Step 1 Enter last year's operating expenses (from our model): Step 2 Enter last year's cost of maintaining your staff of employees, including the owner(s). Wages: Mandatory benefits: Company-paid benefits: Total wages and benefits: $205,200 $23,500 $10,900 $239,600 Step 3 To determine the hard cost of operating the business, subtract total wages and benefits from last year's operating expenses. This number represents the hard cost of all other expenses not related to maintaining a staff of employees. $212,450 Step 4 The service department is responsible for its share of the above A first-class service department is your competitive edge against the big-box stores. 14 hard cost. To determine the department share, you must first assign a percent of the total square footage of the business facility. Total number of square feet occupied by the business (may include more than one building): 5,000 sq. ft. OUTDOOR POWER EQUIPMENT www.outdoorpowerequipment.com $452,050 Illustration ©istockphoto.com/VLADGRINVLADGRIN.