Since the pandemic of 2020, we have seen the pendulum of customer demand of wrecked cars swing from the left with little work (2020), all the way to the right (2021-2023), to somewhat middle (midyear 2024-March 2025).
High inflation has had an impact on everyone in the last five years. But we collision shop owners have seen our employees’ payroll skyrocket. What is one to do, you ask? For the rest of this month and next month’s column, we are going to have a two-part series on ways to control high payroll.
For starters, not only did we see our current employees needing higher wages to keep them, but many shops added more employees. MSOs even headhunted technicians with alluring $10-15K+ sign-on bonuses.
So, when is the right time to add employees? Many owners think it is when they have more work than they can get done or want to take some tasks off their plate. This can be understandable, but it’s just backward thinking. The only time we should add an employee is at the last possible moment -- and more importantly -- can afford to do so! Let’s say we have a $3,000,000 shop. Its net profit is less than 10% ($300,000) and it’s are booked out for more than 3-4 weeks. The owner thinks, “I must hire another technician.” Wrong! Here is what happens. They hire another technician or two, maybe an additional estimator, and then their gross sales curve goes up from $3,000,000 to $3,750,000. But the net profit curve likely stays flat at $300,000. Not only did the owner make the SAME net profit or even less, but he/she has compounded his or her stress level. Growth is likely not his or her answer to increasing net profit. Instead, the owner's business management skills need fixing.
At a 10% or less net profit, cash flow issues will abound, capital for new equipment is off the table, and it is very hard for the owner to build up equity. Equity is your assets (what you own) minus your liabilities (what you owe). Understand this: a single independent shop should strive for a 20%+ net profit, and a multi-store should be 15%. I have heard every excuse in the book why a 20% net profit is just not possible. But as Henry Ford said, "Whether you think you can or think you can’t, you’re right.”
How can one fix these shop owners’ thinking? It’s quite simple, but it requires courage.
Step 1: Take our example shop from above. After growth, downsizing from $3,750,000 to $2,500,000 per year will help to right the ship to increase net profit quite easily to 15% ($375,000) or more. First, the owner needs to take a hard look at the unprofitable customers. It’s time to weed out the bad ones and keep only the good ones. Let’s take insurance companies, many management systems will tell you which insurers pay the highest estimate hours (for not-included operations, etc.) and have the highest gross profit. Let’s say Mrs. Jones comes in with her wrecked car and she has ABC Nightmare Ins. Co. You would tell her, “Mrs. Jones, ABC is very difficult to work with. We will be glad to fix your car, but you will need to pay us out of pocket and then you will deal directly with ABC Insurer.” Another option is to tell her, “I am sure ABC has a preferred discount shop that will be happy to work on your car for only what ABC is willing to pay.” After you have weeded out the bad insurers, then it’s time to take a hard look at your customer base. Maybe you are repairing some low-gross profit fleet work, like rental cars or even some wholesale dealer work etc. Out they go, and it’s time to let the shop down the street work for free!
Step 2: The fallout from downsizing is we are going to have too many employees. Who to cut? It’s simple, we know in our hearts who the keepers are. As Mike Anderson has preached to us, “Hire slow and fire fast.” Unfortunately, we usually get this turned around. I know I have more than I would like to admit. Be extremely careful in hiring family members of ours or even our employees. Examples: cousin Eddie, sister-in-law Nicole or nephew Zach, our painter’s brother, etc., as we can feel trapped that we can’t fire them if needed. Here’s the golden rule to never break: do not hire someone because you feel sorry for them. ALWAYS protect the house!
Step 3: Lastly, when it comes to cost of living pay increases, this can only be possible by constantly pushing for higher labor rates and better estimating.
Next month, we are going to look at how sports teams manage their rosters and will apply this strategy to body shops.
