Business Simplified: Key is income vs. expenses
By Jeff Sheets
Business can sometimes get complicated. We miss the forest for the trees, as a wise sage once said. There are schedules, balance sheets, deliveries, warranty issues, employee turnover, collection problems and computer malfunctions. You could probably list 100 more problems in an outdoor power equipment dealership, but you need to remember the main thing: Income must exceed expenses for a business to exist for the long term. No one should or can stay in a business that loses money year after year. I know there is “creative accounting” that makes us look like we did worse for tax reasons. But, in the long run, if you spend more money than you make either personally or professionally, there will be a day of reckoning with consequences. The purpose of this month’s article is to help you see your business from a profit-centered point of view. More profit equals more opportunities for a business to do more for the owners and employees.
INCOME
1) Never be afraid to sell a product for the retail price: Sometimes, you get beat up on price — or think you’re getting beat up on price — because you sacrifice it so easily. You need to avoid selling for a discounted amount as much as possible. Your competitors may be handing out frequent discounts, but sooner or later, they will fall on the sword of unprofitability. In the ‘80s, I set up financing for retail stores in my market. Personal computers were all the rage, and there was a standard price that was being charged — except for one store that was getting by on very low margins. His reasoning was that high volume would lead to profitability. Guess what happened? After about five years and running through all of his family’s money, he was proven wrong. You need to make a substantial profit, so you can keep the lights on and the employees working. Don’t fall for the trap that volume makes up for it. There is an opportunity cost every time that you discount your products, and then it snowballs because one customer tells another customer and suddenly that becomes why people come visit you. You want customers to come to you because they sense that you are worth paying the price on the equipment, not because you will hand over your profit to them.
2) Your service department must make money: In order for your dealership to be highly successful, you need the service department to produce profits and not be a zero profit part of your business. I would hope that your shop labor rate would give you a three times mark-up on the wages that you are paying your technicians. If you paid your technician $60 for a repair, then you would want to bill that labor to your customer for $180. In other words, if your shop labor rate is $100 an hour, it would be possible for your techs to make $33 on that repair if they met the goal of finishing the repair in one hour. When you produce income like this, then there is a golden opportunity for the business to do very well and your best technicians too. Customers will pay to have their equipment repaired quickly and efficiently. You need to have service technicians that can meet the demand and perform under pressure, leading to a win-win situation for you and them.
3) Parts costing less than $10 need to be marked up significantly more than their suggested retail price: You need to mark up these low-cost parts immediately. Many of them are generic in nature such as bolts, screws and filters. If you walk into a hardware store, you will see this type of pricing. You might buy four nuts and bolts for $3. The cost on those items is so small, but the store is selling them at retail for an incredible mark-up. Why? Since you’re already at their locations and you don’t want to go to several different places to save 50 cents, you pay the price and move on. The same thing holds true for your customers. They accept your pricing on these items because that is what they would pay elsewhere. Do not charge normal mark-up prices on low-cost items. Make as much profit as you possibly can on them. You will see the difference when you look at the profit margins on your reports. If you gain another 2- to 3-percent margin in your parts department, that is worth it to you and your business.
EXPENSES
1) Employee expense is the #1 expense to pay attention to: If employee expense gets out of hand, then no matter what you do, pricing on products won’t make a difference. You need to cost justify every employee who works for you. That is why you need to set standards and make sure that your employees meet them monthly and yearly, because if they aren’t, you need to find and pay people who will. I have walked in enough OPE dealerships to see employees who have been skating by for years, doing just the bare minimum because they have never been challenged. As an owner, you work hard and you need employees who work hard too. Always make sure that the new position is needed before adding it, and I suggest adding part-time help to verify that the person and need are there. It is easier to decide not to bring on a part-time person than having to drop a full-time person to part-time status. Get by with fewer employees rather than more, and reward those who do more, with incentives and perks to keep them satisfied in their position.
2) Your rent or mortgage needs to be kept as low as possible: You need enough square footage to have a nice sales area, a modest parts department and a decent-sized service area, but your goal should be to maximize your profit-generating space. I have visited dealerships with huge parts departments. I suggest using high-density cabinets to help save space for other parts of your dealership. Less space for parts means more space for technicians to work or products to be displayed and sold, allowing more profit to be generated. I suggest visiting other OPE dealerships to see their space utilization. Sometimes, you can pick up good ideas from your competitors on how they are doing things. If you travel out of your area, be sure to check out other OPE dealerships and how they do business because there are always new thoughts and ways of doing things in every region of the country.
3) Use a business management system that makes sense for your business: You may not need all the bells and whistles that every business management system has to offer, so make sure that the one you choose is right for you. Sometimes, these systems can be expensive and you must cost justify them just like you do employees. Be careful not to spend too much but also be sure to upgrade when opportunities present themselves, because some of those extra items can make the lives of you and your employees much easier. It is an area where you just need to know when going to a more robust system makes sense. It is worth the time and effort to investigate every industry-specific business management system to see what is the best fit and falls within your budget.
Here are a couple of quotes to live by. Sam Walton said, “Control your expenses better than your competition. This is where you can always find the competitive advantage.” Elon Musk stated, “If you’re trying to create a company, it’s like baking a cake. You have to have all the ingredients in the right proportion.” These two men know of what they speak. You need to always be looking for ways to make the ingredients in the right proportions. Produce income and keep your expenses in line, and you will have a profitable enterprise.
Jeff Sheets is the founder and owner of OPE Consulting Services. Whether a business is thriving or struggling to survive, Sheets’ rich experience in both the corporate and not-for-profit sectors allows him to partner with business owners to customize unique strategies for their needs. For the past 11 years, he has worked extensively with hundreds of outdoor power equipment dealers to create best practices in business structure, personnel management and financial profitability. For more information, he may be contacted at opeconsultingservices@gmail.com or (816) 260-5430. You can also follow him on Twitter @opeconsult, connect with him on LinkedIn, and visit his website at www.opeconsultingservices.com.
