The sad truth is that most people running businesses in our industry don’t have much experience in Fixed Ops. The variable side is given more attention and that’s just the way it’s always been. When it comes to service, they just say “get me gross profit.” But what they mean is: get me profit. But these two are not the same, and that’s a really important lesson to drill down on. Understanding the difference between net profit and gross profit is crucial.
Gross Profit vs. Net Profit: Understanding Earnings
There’s a lot of service manager turnover in this industry, sometimes 50% on average. And I think a big part of that reality has to do with being told to chase gross profit instead of profit.
Let’s say you’re making $1 million in profit. The value of your business is a multiple of those earnings, dependent on the sector it’s in. A pharmaceutical business might be worth 15 times earnings, whereas a sandwich shop might be worth 3 times earnings. Rest homes for elderly care might sell for 3-5 times earnings. Dealerships, however, tend to sell for 5-10 times earnings, but on average it’s closer to 8-10.
So if you do the math, the value of your business is probably something like $8 Million plus any assets you might have, like the land your building’s on, the building itself, etc.
Gross Profit vs. Net Profit: Understanding Value
And to go even further, let’s say your dealership $1 Million is all from sales, while service is just breaking even. Now we come in and optimize the processes, and after a year you’re making a million in service as well. Now your company has doubled its profit, but think about the ripple effect at play here. The overall value of your dealership has also doubled, from $8 Million to $16 Millon.
When you calculate how much a dealership is worth, gross profit is never part of the conversation. If a dealer goes to borrow money, gross profit is never part of the equation. Banks, buyers, investors, they look at the cash flow. They just care about profit. $8 to $16 million is a pretty significant increase. As a service manager, you need to understand that you’re being graded on the dealership’s net worth whether the upper management communicates that to you or not.
Gross Profit vs. Net Profit: Understanding Bargaining Power
So aside from the increase in profit, which is obviously good, what’s the significance of this increase in value? The real answer to that question is pretty simple…that value is the business’ power when they want to expand.
Sometimes a dealership will come to us and they’re doing well and they want to increase their value even more before a potential sale. Sometimes a dealership comes to us and they’re doing just okay. They have an offer to sell, but it’s just not as high as they want it to be. They realize they can have a tremendous asset if they optimize their fixed ops.
In good times and in bad times, the smartest business owners are trying to maximize their profit in fixed ops because no matter what happens to new and used cards, they can have a steady value for their asset.
Gross Profit vs. Net Profit: Understanding the Disconnect
Why do you think most managers don’t understand this reality? It’s because they’re in a closed loop system. They’re just doing what they’re told. The GM says they need to make $500,000 in gross this month, so that’s the focus. They’re never thinking about the end goal or the value of the dealership as an asset, they’re just trying to keep their jobs.
And I don’t blame them for that because a lot of the time, service managers aren’t even given access to financials. A lot of time when people come to our bootcamps, it’s the first time they’ve seen financials. And I just can’t believe so many of them are asked to work that way.. I think it’s like driving without a steering wheel.
One of the first things we do in coaching is break open that closed loop system and start helping managers understand the bigger picture. Business is about making a profit. It’s not just about sales. If you’re pulling in sales and then spending all of that money, it’s all for naught.
Recap: What Dealers Get Wrong About Gross Profit
It’s absolutely essential to understand how your business’ earnings equate to value, and how that value translates to bargaining power in the market. It’s a real shame how many dealerships leave hundreds of thousands, if not millions, of money on the table by neglecting the fixed side.
At the end of the day, business is about making a profit, and service managers need to understand the real net profit of their work, not just gross. Gaining access to those financials helps make that connection and break down those barriers. With that knowledge in hand, you can see the profit equation in context.
Then you can start to manipulate your profit equation. That profit equation includes a few different factors, the first of which being the availability to production. You need techs….you can’t sell if you don’t have the capacity to sell in the shop. It’s the biggest lever to pull.
After that, you get into pricing structures, what you’re selling, customer retention, the systems in place. There are new ways to think about all of these factors, and the old ways are just not working anymore. Service managers need to be constantly educating themselves and adapting to the changes in the industry to continue performing at a high level.