Last month, we looked at when is the right time to add employees, when we should downsize, and customers to avoid. This month, we are going to look at how we can learn to control payroll costs by looking at professional sport teams.
If we research the NFL (National Football League), NHL (National Hockey League), NBA (National Basketball Association), MLB (Major League Baseball) etc., we find all have one form or another of salary caps. Otherwise, they can only spend a certain amount of money on their players. If this were not so, the team with the deepest pockets would be able to hire the best players in their respective league then win every game over and over.
First off, we need to find out how much we are spending in our shop currently for payroll. Let’s take an example of a similar shop we had in last month’s column of $3,000,000 in gross sales and a 10% net profit or $300,000. Let’s break down their profit & loss statement: parts, paint, and sublet: 36% ($1,080,000), technician wages: 20% ($600,000), admin wages: 8% ($540,000), and overhead costs: 16% ($480,000), for a total of 90% ($2,700,000) in cost to run the business with a 10% ($300,000) net profit. What did this example shop spend on payroll wages? $600,000 + $540,000 = $1,140,000.
In the above shop example, they’re paying 20% + 18% = 38% of their income on employees’ payroll! Let’s say to improve their low net margin, this shop only looked at cutting their high cost of payroll. A 10% net profit = $300,000, and a 20% net profit = $600,000 (a $300,000 increase). In this shop scenario, they need to drop their payroll from $1,140,000 - $300,000 = $840,000 is what is available for wages. How do you think your employees would respond to taking a 25% pay cut? As we know, it would fly over like a lead balloon.
What is one to do? How can a shop doing $3,000,000 in gross sales do it now with only a $840,000 payroll budget? Well, if you have been in the U.S. for any amount of time, you’ve likely heard of the football team the New England Patriots and their former head coach Bill Belichick. From 2002-2019 the Patriots under Belichick’s leadership, they won six Superbowls and eleven AFC championships. How can this be possible with every team in the NFL having the exact same salary cap? Belichick had the ability to maximize his payroll dollars for high productivity. Take their quarterback at the time, Tom Brady. If they wouldn’t have good linemen on offense to protect him, he would have been flattened like a pancake. They also needed a wide receiver to catch the ball, defense, a kicker, etc. What is one to do that is different from all the other teams?
Belichick had a sixth sense when it came to managing his roster. As an example, let’s take a veteran all pro free safety who had won even Superbowls with the Patriots. Belichick would not re-sign the player at the end of his contract, even though he was at the peak of his career. He would then be quickly picked up by another team for possibly even more money. Then Belichick would find a young free safety in the NFL draft, train and teach him well, and within half the season they were back where they started, with nearly 80-90% SAVINGS.
“Wait a minute, Greg,” you’re thinking. “This is collision repair were talking about here, not football!” Tom Brady was to Belichick what our head body tech or painter is to our shops. We only need one or two "A" body techs or painters. Let’s go back to our $3,000,000 shop. Why would they need four expensive "A" body techs? A top tech is just like the lead heart surgeon in a hospital. The doctor comes into the operating room, and the patient is prepped by lower paid subordinates. The surgery is performed, and the doctor is on to the next operating room.
In my shop, I have one primary (“doctor”) body tech and head painter and we’re projecting $5M in gross sales this year. Granted, I have others who are cross-trained for when the “doctors” are on vacation. We have hired four apprentices in the last three years and have a career path for each. We have no detailers, no porters, no janitors, etc. Every employee in my shop rotates through a bathroom-cleaning schedule, and this includes me, the owner. It's funny how clean the bathroom stays!
If you get a chance, watch the movie “Moneyball” with Brad Pitt. It tells the strategy of how the Oakland As achieved great success with the smallest payroll budget at the time of any other MLB team. With these types of concepts, a 20%+ net profit can be achieved!
