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Letter to the Editor

Lower Costs, Higher Profits

Doing the math to improve the collision repair facility business profit-cost equation

There is a simple rule in business that if you want to increase profits, you need to either increase sales and revenue, or decrease costs and expenses.

If you want to work on the expense side of that equation by reducing your costs of doing business, one key is to start to measure those costs as a percentage of revenue. Run that calculation using your past three or four annual financial statements. If that percentage has changed from year to year, one thing will be clear: Decrease that percentage and your profit increases, even if your revenues are not growing.

Once you have established what your costs have been in the past as a percentage of sales, you can turn your attention to making sure that percentage starts to go down.

Rein in insurance costs

Business-related insurance coverages can be a key area to look at when trying to reduce expenses.

Take your workers' compensation insurance, for example. You or your insurance broker should make sure your employees are properly classified. You may be paying as much as $5 to $7 in workers' comp premium for every $100 in payroll for technicians, for example, while rates for the office workers in your shop may be closer to $1 or $1.50 per $100 in payroll.

Because your premiums are based in part on payroll, if a slowdown in work has significantly reduced your payroll, it may be worth going back to the insurance carrier to see if your premiums can be adjusted to reflect the decreased payroll.

As with all insurance, your workers' comp rates are also based on your claims history, so making efforts to reduce workplace injuries will help you reduce costs. Ask your insurance broker or workers' comp carrier to conduct a free safety audit of your shop. They'll point out things that could lead to claims and higher premiums.

Employers can also reduce workers' comp costs by reducing the expense of injuries when they occur. Some states, for example, allow you to designate a clinic where all employee injuries are handled. Get injured employees back to work - even if on light-duty handling paperwork - as quickly as they are medically able. And if you suspect fraud, push the insurance carrier to investigate.

Double-digit annual increases in medical insurance make providing health coverage for employees among the fastest-growing expenses for most businesses. Some companies have taken the traditional steps to dealing with this: raising their deductible and requiring employees to pay an increasing portion of the premiums.

One of the newer ways to possibly reduce health coverage costs are health savings accounts (HSAs). Such plans can be less expensive because they have a high deductible. Under the plan, however, the company and its workers can put pre-tax money into savings accounts that can grow over time or be used to cover health care expenses. HSAs may be more appealing to some company owners and employees (particularly those who are younger, healthier, or more highly-compensated) than it is for others, but some health insurance providers may even allow you to offer employees a choice of either an HSA or a traditional plan.

Business property and liability premiums also tend to be dropping after rising dramatically after 9/11, so now may be a good time to shop around, particularly with the five or six carriers who specialize in business insurance for the automotive repair industry.

And just as many DRPs require participating shops to carry a set amount of liability insurance, shops too should make sure their sublet or other vendors are adequately protecting the shop. Ask your key vendors or sublet providers to name you as an additional insured on their policy.

Compare out-sourcing vs. in-house

But insurance is just one area shops can look at when working to reduce costs.

"In the last three years, I've never looked at my balance sheet so hard to figure out where I can save money," said Robert Edgar, the third-generation owner of Collision Rebuilders, Inc., in Portland, Ore. "I even eliminated my laundry service and went out and bought a washer and dryer for the shop to try to save money. I don't need to spend $8,000 a year paying a laundry service when I can buy a washer and dryer for $700 or $800 and do it myself. You can buy towels and uniforms if you want to supply them and cut your overhead there."

Other shop owners have run the numbers and based on their utility and labor costs have found a laundry service makes sense. The key is not which decision you come to; the key is that you are looking at expenditures to make sure they make sense.

Payroll outsourcing has become an increasingly competitive service, so if it's been several years since you considered turning payroll over to an outside firm - or shopped around to make sure your payroll service provider is still competitive - this may be a good time to do so.

With fax lines, high-speed internet, cell phones and other telecommunication expenses becoming more complex, shops may find it worthwhile to more closely audit their phone company and related bills. Some studies have found a high percentage of such bills contain errors and that many companies are paying incorrect fees or taxes to telecommunication providers.

While you can certainly audit these bills yourself, it may be another service you want to outsource. Type "telecommunications audit" into an internet search engine, and you'll find dozens of listings for firms that will audit your telecommunications bills on a one-time or ongoing basis. Many of these firms say they regularly find savings of 10 to 20 percent for businesses, and some charge no fee, instead taking a percentage of the savings they find.

Cutting utility costs

Dick Guthrie, owner of J & D Auto Body with shops in Lodi and Galt, Calif., said he sees reducing costs as increasingly critical to success for shops.

"We came to the realization that we are really limited as to the amount of 'raw material' that's out there in the form of wrecked cars," Guthrie said. "And we know that number is diminishing more each year. With that said, you can continue to gobble up market share from your competitor, but at some point in time, you've taken away all that you can, and what's left are his core customers who you are not going to get. So how do you affect net profit then? The way to increase profit is to reduce your operating expenses."

He said one way to approach it is not to look just for one or two major areas for cost savings, but instead to look for lots of smaller ways to trim costs. With natural gas and other utility costs climbing, Guthrie said shops should consider lowering the bake time on the paint booth drying cycle. Timers on restroom lights and fans will prevent them from running unnecessarily. Adjust the thermostat in the shop office to reduce heating or cooling expenses; one degree can make as much as a 20 percent cut in a utility bill. Train employees to turn off the vacuum system and paint booth lights when they're not needed.

"We've gotten to the point that when we fax information from one of our shops to the other, we don't use a cover sheet," Guthrie said. "It saves one piece of paper on this end, and one sheet on that end."

It also saves wear and tear on the machines, as well as toner and electricity usage.

"Yeah, it's not all that much money, but if you consider everything like that as profit leaking out, you can find a lot of ways to save money," Guthrie said. "Those nickels and dimes add up to dollars."

Many utility companies also will conduct audits for businesses, coming through the shop to offer suggestions of ways to reduce energy use. They also can help shops find out about tax rebates or other subsidies that may be available, for example, to cover all or some of the cost to install more efficient lighting systems - which then offer cost savings of their own.

More cost-saving quick tips

Here's a quick run-down of some other money-saving tips:

• Fees to process a charge on a customer's debit card are generally half of what they are if that customer uses a credit card. The catch: You need to have the keypad available so the customer can enter their PIN at the time of the transaction. With debit cards now accounting for nearly half of all "card swipe transactions" being processed by retail companies, it can pay to upgrade your processing equipment. Card processing fees in general vary widely, so this is another service it makes sense to comparison shop every few years.
• Most people view their lease as a fixed cost, one that can't be changed until the lease renewal. While this is generally the case, the market for commercial property is weak in some areas, and shops in these markets may be able to negotiate down their rent mid-lease.
• If you're in a jurisdiction in which companies must pay personal property tax, make sure you get rid of any equipment or tools that aren't being used - and that you've taken anything you no longer have off the tax rolls.
• Reduce energy costs by finding and fixing compressed air leaks promptly to reduce the amount of time the air compressor runs. Give all of your technicians garage door openers to reduce the amount of time that overhead doors are open - and letting heat in or out.
• Think your newly-assessed property tax is out-of-line? It may be worth challenging the assessment yourself - or hiring one of the companies that will handle the challenge for you for a fee. If you outsource this, work with a local company that may know the market better than some of the national assessment-challenging firms.

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Have a comment about this article? Send Email to Charles Baker, INSIGHT's Publisher

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