One goal of any business is to increase its profit, but increased profit doesn’t always lead to increased profit margins. Whether running a tattoo shop or an auto repair shop, a business owner needs to understand the difference between profit and profit margin and realize which one serves you as a better measurement for understanding costs.
Profit is Total Revenue Minus Total Expenses
This can help anyone better understand profit: sales-expenses=profit. This is a formula that is outdated and lazy, that we should be getting away from and is keeping you from being successful in your business. From now on I want you to think of Profit as: Sales-Profit=Expenses, but more on that later.
For example, let's say an auto repair shop sells $500,000 worth of parts and labor a year and its total expenses to operate the store (rent, utilities, labor, advertising, licenses, merchandise etc.) totals $400,000. Take the $500,000 in revenue and subtract the $400,000 in expenses, and that auto repair shop has an annual profit, also called net income, of $100,000.
Profit Margin Measures a Company's Profitability
Profit margin acts as a measurement of a company’s profitability. It measures how much a company keeps in earnings from every dollar of sales it generates. Unlike profit, which gets measured in dollars and cents, profit margin gets measured as a percentage. To measure profit margin, use the auto repair shops net income divided by the total sales generated.
For example, the auto repair shop had a net income of $100,000 and generated $500,000 in sales. To determine the store's profit margin, divide the net income ($100,000) by the total sales revenue ($500,000) and the store has a 20% profit margin – $100,000/$500,000 = 0.20 or 20%.
Profit vs. Profit Margin
The profit margin also acts as a gauge of your company’s control on operating costs. Using the example auto repair shop, assume that the store increases its sales to $700,000 annually; to get the sales increase, the store advertised more, hired another service advisor and technicians to manage the increased car count, rented and remodeled an adjacent space for increased showroom visibility and purchased more parts than normal. Imagine these additional expenses increased the company’s overall operating cost to $600,000 annually.
Looking at the new figures, the company still has a profit of $100,000 (total revenue minus total expenses) but its profit margin has shrunk from 20% down to 14.3% ($100,000/$700,000 = 0.1428 or 14.3%).
Importance of Understanding Profit Margin
It is important for any auto repair shop owner to understand its profit margin. Increased revenue does not always lead to increased profitability. When you as an auto shop owner take control over your profit margin, it places itself in a better position to control costs and make effective sales plans to increase revenue.
Considerations for Reducing Costs
In an attempt to increase profit margin, a lot of auto repair shops look to increase sales first. In reality, the shop that reduces its costs by a small percentage has a faster impact on profit margin than one that increases sales by a small percentage.
For example, assume the example auto repair shop has a total revenue of $100,000 and total expenses of $95,000, leaving it a profit of $5,000 or a 5% profit margin. Through tighter expense control, the store reduces its expenses by $5,000 to a total of $90,000 while sales remain at $100,000. The store now operates at a 10% profit margin ($10,000/$100,000 = 0.10 or 10%).
In order for the store to realize the same 10% profit margin from increased sales, the store needs to sell $105,557 ($105,557-$95,000 = $10,557 in profit). This translates into a 10% profit margin ($10,557/$105,557 = 0.10 or 10%). It is typically easier to find ways to reduce cost than to increase sales.
This formula helps auto shop owners control their expenses, increase profits and provides them with a cash management system that puts them in the winners circle.
THE PROFIT FIRST DIFFERENTIATOR
Chris Cotton utilizes the Profit First method of cash management. He is trained and certified by the Profit First Professionals organization to guide auto repair shop,quick lube shop and tire shop owners maximize their profits.
AutoFix is the ONLY Auto Shop Coaching firm, nationwide, that has achieved certification in Profit First. What does this mean for you? In addition to Chris's coaching services, the Profit First method will guide you to greatly increase the profitability of your business. Of course, Chris will guide you through the business challenges you face, as you'd expect from any coach you hire. He will also address the most important factor for any business - maximizing your profits.
To-do lists that require you to change your behavior have proven to be extremely ineffective. My process puts "behavioral guardrails" in place that allow you to achieve your objectives by NOT changing yourself. Give me a call, or fill out the contact form, for a profitability assessment and profit strategy guide. This service is completely free and by the end of our discussion you will be well equipped to boost your profits!
Chris Cotton is a former shop owner having had a general service repair facility that also did tires and a quick lube that did tires as well. He has been in the customer service industry for 40+ years and has been in the Auto Repair and Tire Industry for over 25 years. He loves helping shop owners just like you get to where you want to go. Chris is the ONLY Certified Profit First Coach serving the auto repair industry. Chris is currently in Washington living his dream of traveling the country with his family and helping shop owners every day through his Coaching Program or with his Business Development 20 Group Meetings. If you are interested in either or just want to talk about business Feel free to email him at: [email protected] or call him at 580-491-3519