Are You Maximizing Your Service Department Income?

Your Service Department can and should be your best profit producing department in your dealership. Unfortunately this is not always the case, however there are a number of factors and hard targets you can review to identify any shortcomings you may be experiencing. Read More.

When analyzing dealer financial statements, there are a number of constants that begin to appear in the most successful and profitable dealers. The Service Department is no exception. First and foremost, you must ensure the accounting for the Service Department is done in a manner that is consistent with the industry. Your service technician wages should be separated from the company's salary expense and charged as a cost of goods sold so you can calculate a true gross margin. If you have a service writer I would include their wages as part of your salaries expense, not as a cost of goods sold for the department.

Now that you are comparing apples to apples within the industry, what other factors can you review to evaluate the profit produced in the service department?

  1. Door Rate: You should evaluate your labour rate on a regular basis, since this typically can be a moving target. Don't undervalue the quality of the service you provide your customers just because other local dealers may have a lower door rate.
  2. Efficiency Ratio: Probably the most important aspect of your service department is the number of billable hours you are achieving on a weekly basis. This can be a real eye opener when you compare the number of available billable hours to the number you have invoiced during the week. You simply take the number of hours your dealership is open during the week, less lunch hours and breaks, times the number of technicians you have working. For example, if your dealership is open for 8 hours a day and you have 2 Service Technicians who are allowed 30 minutes for lunch plus two 15 minute breaks, your billable hours for the week are 70.
  3. Service Volume: Statistics show your service volume has a direct relationship to the number of units you sell, the number of units operating in your market place and your desire to service other manufacturers product.
  4. Come Backs: If you have a high ratio of come backs due to service work that was not performed properly, this is a profit killer. You would therefore want to assess the level of your Technician's competence and provide training in any areas of weakness. Regardless of your come back ratio, always take advantage of the manufacturer service training schools. It is an investment in your profitability.
  5. Wage Format: If you have a busy shop but your efficiency ratio is low, then you may consider paying your Technicians on a job rate as opposed to hourly wage. The Technician is paid a percentage of the jobs he/she completes. This is the standard in the auto industry and is a great motivator to complete jobs on a timely basis freeing up the Technician to move on to the next work order. You would be amazed how fast your efficiency ratio goes up under this wage format. It's not for every dealership but certainly something to consider.

Obviously the higher number of actual billable hours you achieve, the better your efficiency ratio will be. The hard line on this comes when you calculate your profit margin. Typically profitable dealers are achieving a gross margin of 65% to 70% of gross sales in their Service Department. If your shop is always busy and you are achieving a gross margin that is considerably less than this, check your efficiency ratio. Are the jobs being completed within the warranty published allotted time? Heaven forbid is there too many smoke breaks going on out the back of the shop? Are parts available in stock to complete the job before it is started? These are all important things that should be consistently under review.

Coupled with your gross margin is your volume target. Again, profitable dealers are achieving a volume of 9% or more of gross sales. If your volume percentage is running less that this target, there are a few considerations you can look at. Are your customers satisfied with the work that has been performed? If you don't know, send out surveys to assess the quality of service you are providing. Focus some of your advertising dollars on oil change and tune up specials, winterizing, summerizing etc.

Finally, always take advantage of the training schools and courses that are made available to ensure you have the top Technicians in the market place. These are well invested dollars in the success of your Service Department.

At a gross margin of 70%, this is the best revenue earning department in your dealership, so do the test to make sure you are maximizing your profit potential. If you need or want help, contact me for a free consultation.

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