ADN WINTER 2022_WEB

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Overhead vs. Expenses To understand the difference between overhead and expenses; think of overhead as any costs that are going to continue to incur whether you’re doing any work or not. In other words, if all work stopped, what costs would you still have to pay? Expenses are everything else you pay in order to do the work. Here are some examples: OVERHEAD: ✔ Rent ✔ Shop insurance ✔ Water ✔ Electricity ✔ Garbage ✔ Advertising ✔ Health insurance (only if you’re in the USA) ✔ Your employee’s paid time off ✔ Banking fees ✔ Software subscriptions (like Urable and Quickbooks) ✔ Annual CPA/attorney costs ✔ Phone bill ✔ Significant tools (like polishers/ pressure washers/plotters/ steamers) ✔ Uniforms ✔ Debt/loan payments ✔ Your wages ✔ Your employees’ wages. Here’s where people get confused… they say “But Jason, why should the wages be categorized as overhead?” The answer to that is because if you’re trying to build a business that keeps you and your employees in full employment yearround, then you need to consider these as overhead costs that will continue no matter what. Otherwise, you’ll be tempted to think it’s “ok” to cut your own wages during slow times, or send workers home early when there’s not enough work for them. You need the pressure of knowing that all wages are going to incur no matter what… so you better take in enough income to cover them! Another small item; I know that if all work stopped you technically wouldn’t have to pay for electricity and water, but we’re going on the assumption that you’ll have to pay these monthly as usual. Don’t get caught up in the minutia here. EXPENSES: ✔ Chemicals ✔ Towels ✔ Ceramic coating kits ✔ PPF rolls Converting these numbers into prices ✔ Merchant credit card fees ✔ Damage to customers’ cars ✔ Small tool expenses (like buffer pads, brushes, microfiber towels) ✔ Repairs on tools (Like o-rings, valves, cords, and anything else that gets “used up” when you work) PROFITS: I take home at least 15% of my company’s total gross receipts and so should you. This is your stockholder dividend/distribution as the company owner. This is in addition to your wages. No, I’m not joking. Design your company to pay you for your time, effort, and risk just like any company. Most owners make the mistake of thinking that their take-home profits are just anything left over after paying all the bills. This is why most business owners never have any profits to take home, because they do not prioritize them as an essential part of their business. If you design profits into your pricing, then you’ll have a company that truly serves you. Now you have to whittle these numbers down to your actual prices. To do this: 1. Take all your annual overhead costs and divide it by the number of days you’re open for business per year. Usually, it’s around 243 days per year on average if you’re open 5 days a week. This accounts for holidays, snow days, etc. This number is your Daily Overhead Minimum. 2. Divide your DOM by the number of daily hours you have as inventory. Meaning, how many hours do you have at your disposal to do the actual work? This does not include time you need to spend doing other items like setting up shop, answering calls, invoicing, driving to appointments, fixing equipment, paying bills, giving estimates, etc. You don’t get paid to do these tasks so you need to charge accordingly when you are doing tasks that you get paid for. 3. For a solopreneur this may mean that you have 6 hours available to do the work each day. If you have employees, then add in the number of hours they actually work on jobs each day. For a company of 3 employees plus yourself it might look something like this: You: 4 hours Manager: 2 hours Two Worker Employees: 7 hours each This equals a total of 20 hours per day of actually working on jobs. (Remember, this doesn’t include time spent setting up equipment, repairing tools, cleaning vacuums, etc.). This number is your Daily Hourly Inventory. The sooner you start thinking of your company as having an “inventory of hours”, the easier it is to really start making more profits because it shifts your mindset to try to “sell” as many of the hours you have as inventory every day. Just like a hotel manager has an inventory of rooms that they must sell every night, you must sell your hours of inventory every day, or they’re lost… forever. Once a hotel room goes vacant for a night, they can never earn that lost money back, and neither can you on your labor inventory. 4. Now divide your DOM by your DHI and this result is your Hourly Overhead Minimum. As a side note, these calculations assume that all your workers are working on jobs, not standing around waiting for work to come in the door, or fixing/cleaning equipment, or otherwise on-the-clock but not doing the work. Now you’re starting to understand what kind of hourly rate you need to charge for your shop. But we’re not done yet! When quoting a job, you’ll estimate how many hours you think it will take to complete the job, then multiply that by your HOM, then add in the expenses that you will incur for that specific job. Let’s say it’s a ceramic coating job where the kit costs you $300. Since you should be marking up all your product sales at least 20%-50% (to cover shipping, storage, spoilage, etc) then you’d add another $60 to the quote. How much do you charge for little things like buffer pads, towels, polishes, clay towels, etc? Those are harder to break down into a per-job cost, so just estimate it using your historical costs over time. It’s too tedious to calculate how much polish you use per car, so just estimate it. Close enough is good enough for small items like that. Just be very accurate with large things like ceramic kits, PPF, etc. so sharpen your pencil when calculating those items. 26 | AUTO DETAILING NEWS | VOL. 7, NO. 4 • WINTER 2022
5. Lastly, add at least 20% for profit, of which 15% you’ll take home yourself. EXAMPLE QUOTE: DOM: $1,700 DHI: 20 hours Hourly Overhead Minimum: $85 Ceramic Coating Job: 8 hours labor $85 x 8 = $680 Ceramic kit: $300 + 20% markup = $360 Profit 20%: $680 + $360 = $1,040 / 0.84 = $1,238 termined by what someone is willing to pay for it. This means that you can and should charge anything over the $1,238 that your clients are willing to pay.How much more? This is where learning what your closest competitors charge can help you. If you’re trying to position yourself as the expert in your field, then you must be the highest priced shop around. For example; if your competitors are charging $1,498 for a ceramic coating job, then you should be at least $200+ over that. On the other hand, if you’re trying to position yourself as the low-price leader (which is strongly discouraged by me), then just charge your calculated amount from above. But be aware that you’re leaving free money on the table for all your hard work, training, expertise, passion, risk, and investment. There you have it, the most accurate way to determine your pricing. After So $1,238 is the bare minimum you must charge for this job. However, there is another factor at play that you must consider: In a free market, the true value of any service is, by definition, desome time you’ll get better at quoting accurate prices. Just remember to regularly review all your numbers so that your prices keep up with your rising expenses. I do a deep-dive review quarterly and raise prices accordingly. Questions about what we’ve discussed here? I can be reached at: jason@automotiveprofitsacademy.com You may also check out my other free PDFs for detail business owners at www.automotiveprofitsacademy.com. JASON BARKER, CD-SV, has owned and operated Fresh Start Detail Co. in Beaverton, Oregon, since 1995. He also sells online courses that help owners turn their businesses into a more profitable asset that they enjoy. Jason is also a public speaker within the automotive industry. He can be reached at: jason@ automotiveprofitsacademy.com or www. Automotive ProfitsAcademy.com. Questions to Ask: ✔ What are your overhead costs? ✔ What is your daily overhead minimum (DOM)? ✔ What are your expenses? ✔ What is your competitor charging? ✔ What is your daily hourly income (DHI)? ✔ What is your hourly overhead minimum (HOM)? ✔ How many hours will it take to complete a job? Join Today & Get Involved! The-IDA.com Education | Certification | Social Media Discussions | Awards Programs | Technical Expertise | Newsletters | And more! VOL. 7, NO.4 • WINTER 2022 | AUTO DETAILING NEWS | 27
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