Motor repair business

Case Study 4 - Motor Repair Business

Background and Problem

The business is located in a rural area with not another “garage for miles around” and whereas the Celtic Tiger was good for car sales the profit was largely going to the motor distributor - a sore point.

The car servicing and repair business had increased however the Managing Director Owner felt that overall profitability in this area did not reflect the risk nor what he should be making out of the business given the volume of work now involved. Whereas gross margins had been maintained, overheads had increased to handle the extra business and he felt he was working for his employees - the overhead that walks in the door every morning.

Simply in his view it was all about reducing his costs and he wanted us to help him get on and do it

Actions Taken

Before accepting the brief we made it clear that what he wanted of us was to work with him in improving and sustaining the profitability of the business This would involve a business Health Check and in-depth analysis and review of his business, followed by preparation of business plans etc. Whereas reducing costs and improving efficiency may well be part of the process it is likely not be the only matter requiring attention.

To simply demonstrate this with a view to altering his “all about reducing costs” mindset we prepared a one page analysis from his preceeding Year's Service Accounts

	€(000)	% of sales
Sales	1,829	100
Direct material costs	828	45
Direct labour	378	21
Gross profit	623	34
Overheads	380	21
Depreciation	25	1
Net profit	218	12

Consider the impact of the following profit/expense movements

• Reduce Overheads by 5% will only increase profits by €19 K
• Increase Sales by 5% will only increase profits by €31K
• Increase Prices by 5% will increase profits by €91K
• Increase Prices by 10% you can maintain profit even if sales fall by 23%
• Decrease prices by 10% to maintain profit you need to increase volume by 43% and assume no increase in overheads

Labour and overheads are not variable, however the message is clear, maintaining a clear focus on pricing policy, looking to maintaining and improving margins (Unit Revenue/Cost of Sales) is just, if not more important than volume and overhead cost concerns in improving profitability.

The Results

A full analysis of the business was undertaken and yes charge-out rates were increased and some business was lost, but of little consequence. Overheads were reduced and the method of recording labour hours and material used changed, to ensure that nothing slipped through and full mark-ups on materials were charged. The new emphasis internally is on maximising control over pricing (no discounts) and exerting local market pricing strength when considered to be available. Service standards were always good but now, with pride better because we now charge what we know we are worth resulting in a doubling in profitability