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Collision repair management 101: You can’t manage what you don’t measure. Fixed costs.

For those of you, dear readers, who follow Etalon Refinish blog, it is probably clear that throughout the articles I try to convey a simple, but, from my point of view, very important idea. Collision repair workshop is first of all a Business, which was set up to make profits. Therefore, as every Business, regardless of size, type or location, the bodyshop must be managed as Business. All rules and axioms apply just as for a supermarket, a hotel or an airline. It is not enough to be a skilled craftsman. Period. The good thing though that business school is not necessary (though wouldn’t heart at all). It is never late to learn basics, which are applicable to collision repair workshop just as to any other enterprise. This blog post will be split onto parts, since it is rather difficult to analyze in depth all the vital aspects within the narrow frame of one post. I will try to bring examples from real life of an average bodyshop so it would be easier to relate business terms to existing everyday problems of an average collision repair facility.

Part 1. Costs

I strongly believe that a profound knowledge of your costs and expenses is fundamental for success. Throughout my career as entrepreneur and supplier I have seen a great number of bodyshop owners who had no clue about their costs level, their segmentation and behavior throughout the year. Remember, you can manage something only if you can measure it.

In the beginning, I would like to specify that we are talking about costs incurred during the workshop operations. Only business oriented costs. One of the biggest mistakes would be to mix business costs and personal expenses. Even if you are a sole owner without partners and employees, keep your two lives, business and personal, apart. Numerous companies have been shut down not because of business failure, but because of private financial mistakes. So, in all businesses and industries , two major costs categories are distinguished: fixed costs and variable costs.

Money

Fixed costs

If you google the term of fixed cost, you will find plenty of definitions, yet I prefer a rather simplistic one: “Fixed costs are costs, which a business pays regardless of the amount of sold products or services provided”. In other words, fixed costs will incur even if a bodyshop doesn’t repair a single vehicle. Usually those costs are not elastic and hard to reduce. The main examples of workshop’s fixed costs:

– Rental costs. If you rent the space, where your bodyshop is located, then it is a fixed cost.

– Mortgage interest rates (when a facility was purchased with mortgage)

– Salaries or fixed part of wages. Sometimes the compensation of an employee consists of a fixed part and bonus based on productivity, profit or achieved targets. Sometimes such costs are called mixed costs, yet for simplicity sake I will put them in fixed costs category. If your painter is working on commission base only, than assign this cost to variables.

– Loan interest rates in case equipment, for example a spraybooth, has been purchased on credit.

– Electricity/natural gas costs and other utilities. Electricity can also be viewed as mixed cost, because the more work is performed in a workshop, the more electricity will be confused, however, to simplify your analysis, you can consider the electricity and similar bills (gas, phones, water etc) as fixed costs for your bodyshop.

– Insurance. Be it insurance against natural disasters, health or occupational insurance, those must be put in fixed cost column of your list.

– Licenses and other legal permits expenses necessary for the bodyshop operation.

– Fixed taxes, be it property tax, local community tax or local chamber of commerce fees.

– Courtesy cars maintenance costs.

– Equipment depreciation. When a new piece of equipment is purchased, it is not put as a whole amount into the fixed costs column. Usually the expense is charged gradually over the useful life of it. For example, if a spray fun costs 360$, and you expect it to work for 18 months, then you should list 20$ every month to your fixed costs.

 

Note: The higher are the fixed costs, the riskier is the bodyshop’s position in case of significant drop of work load. Such a drop could be seasonal, like in some countries; also it can be due to the financial crisis in a given market or worldwide, as well as due to the increased competition. Keeping fixed costs as low as possible is a must for small business long-term survival.

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