By accounting definition, the profit and loss account is a statement that shows how the profit is made and how it is distributed. The profit equation is:
PROFIT = INCOME EARNED LESS REVENUE EXPENDITURE
It’s important to remember that income earned does not necessarily mean that the funds have been received, as it is measured from sales that have been invoiced. This is one of the reasons why a business should not try to use its bank balance to monitor profitability.
Gross profit
From the income earned the first expense to consider is the cost of achieving that income, which is termed the cost of sales. In a bodyshop this would include all of those resources used to complete a repair, such as the wages of the technicians completing the repair and the cost of the paint, materials and parts used to complete the repair.
Subtracting the cost of sales from the income earned leaves what is termed gross profit.
GROSS PROFIT = INCOME EARNED – COST OF SALES
Overall gross profit levels in a bodyshop are typically between 40-45% of income earned.
Trading profit
From the gross profit there are two additional categories of expenses which must be considered. These are:
Direct Expenses
Sometimes known as semi-variable expenses, are those expenses which are not a cost of sale, but will generally change with a variance in the level of turnover of the business, such as salaries of non-productive staff, courtesy car costs, utilities and marketing expenditure.
Indirect Expenses
Sometimes known as fixed costs, are those expenses which are incurred at a fixed level regardless of any variance in turnover, such as rent, business rates, depreciation of fixed assets and trading licences.Subtracting direct and indirect expenses from the gross profit leaves what is known at trading profit.
TRADING PROFIT = GROSS PROFIT – DIRECT EXPENSES – INDIRECT EXPENSES
The level of trading profit for a bodyshop is rarely above five per cent of income earned, and because this level is so low it is very easy for the trading profit to become a loss if it is not closely monitored. Unfortunately trading profit is not the final figure retained by the business owners because interest payments may not have been included in the expenses and, if a profit has been achieved, there will be tax to pay.
Management accounts
Companies are required by law to submit a profit and loss account on an annual basis for the assessment of tax liabilities, but to make it a useful business tool it should be drawn up far more regularly as management accounts. Management accounts will provide a monitor of performance and can be continuously compared to a pre-determined budget or previous performance levels.
Workshop efficiency
The income earned by a bodyshop is generated by the sale of three main commodities: labour, parts and paint and materials. Income can be earned from the sale of other goods and services such as recovery and storage, but this is usually only a small percentage of total turnover. To a certain degree the prices of the three main commodities are controlled by work provider contracts and the ability to increase labour rates and reduce parts discounts is only at the contract negotiation stage. Income earned is strongly influenced by workshop efficiency, which is the measure of how much work can be completed within the time available.
There are three main categories of hours which need to be recorded in order to monitor workshop efficiency:
Hours attended: The hours that technicians attend work after the deduction of holiday and sickness periods
Hours worked: The hours that technicians spend on repairing vehicles after the deduction of idle time, where there is no work available, and non-productive time where they are required to undertake tasks other than repairing cars.
Hours completed: The authorised number of hours for all completed repair processes, regardless of whether or not they have been invoiced.
Wokshop efficiency can then be measured as follows:
Utilisation = Hours worked x 100%
Hours attended
Productive efficiency = Hours completed x 100%
Hours worked
Overall efficiency = Hours completed x 100%
Hours attended
Gross profit margins
Management accounts should be used to monitor the individual gross profit margins on each of the three main sales commodities in addition to the overall gross profit margin.
Whilst the sales values may be fixed, the cost of sale is influenced by business performance.
Cost of labour sales is influenced by the level of technicians’ wages, but more importantly by their productive efficiency. Cost of parts sales is influenced by the discounts negotiated from suppliers and whether unnecessary parts are returned for credit. And cost of paint and materials sales is influenced by the cost and quantity of materials used to complete the repair.
Expense control
Management accounts are a vital tool with which to control expenses. The level of gross profit achieved will illustrate the level of expenses that the business can afford. Direct and indirect expenses should be divided into categories so that they can be monitored against a budgeted figure. Where the income earned varies significantly from the budgeted figures then the direct expenses should increase or decrease only in proportion. Indirect expenses will not change in the short term with a variance in turnover, but the expense control will highlight any unexpected discrepancies.
Key Performance Indicators (KPIs)
In order to analyse management accounts they must be measured against previous performances, industry benchmarks and other similar businesses. This is done by analysis of not just income earned, gross profit and trading profit as monetary values, but by analysis of several KPIs.
KPIs illustrate the different aspects of bodyshop performance as ratios in order that operations of different sizes and different trading periods can be compared. The following KPIs are a good basis on which to analyse bodyshop performance:
Benchmarking
If key performance indicators are calculated on a regular basis they can be benchmarked against group or industry average figures, in order to identify opportunities for improvement. Benchmark figures illustrate the level of performance that can be achieved against each key performance indicator. As many independent bodyshops work in isolation it is not easy for them to appreciate the level of performance that can actually be achieved and how these levels change with market conditions.
Even if a business is achieving the required level of trading profit, there may be some areas of the business that perform below the benchmark levels, highlighting where improvements can be made. For a high performing bodyshop, it is more relevant to use benchmarks from a high performing group of bodyshops for comparison.
Several years ago there were benchmarking programmes available which subscribing repairers could use to track their performance against national and upper quartile benchmarks. Perhaps in the current market conditions, the need for such business tools is greater than ever?