Following the money trail
We’re in business to make a profit, and one of the easiest ways to ensure profitability is to familiarize yourself with your income statements. These statements provide the information necessary to determine job costs and to improve your bottom line.
Understanding your income statement
There are five major sections to an income statement: gross revenue, cost of goods sold, gross profit, operating expenses and net profit. Revenue consists of the income your business receives from its customers. Everything you sell is a revenue item, from the service you provide to the glass, moldings, urethane kits and miscellaneous parts.
Cost of goods sold, or COGS, is the money spent for the products you sell. All of the pieces and parts you buy and resell are COGS and include items such as glass, moldings, urethane, primer, activator, clips, nuts, bolts, tabs and any other parts necessary to complete a job.
Operating expenses consist of everything else you spend money on to run your business and may include wages, rent, insurance, taxes and utilities.
To determine your gross profit, subtract the COGS from your revenue. To determine your net profit, subtract your operating expenses from your gross profit. Figure 1 provides an example of a simple income statement. A real-life example appears on the opposite page.
Determining job costs
To determine a job cost, break it down in the exact same manner you would your income statement. The only difference is that the numbers are for one job, instead of the total for the year. For example, revenue consists of the total price of the job, or the amount of money the customer gives you to complete the installation. COGS consists of the cost of the windshield, urethane, molding and any other parts used on the job.
Operating expenses are divided into two main sections: job direct wage cost and all other operating expenses. To determine job direct wage cost, calculate the technician’s total hourly wage. This wage consists of the installer’s hourly wage, fringe benefits and associated payroll costs. Multiply this number by the actual number of hours it took the technician to complete the job. That is your job direct wage cost. To determine an average operating expense per unit of glass, divide the total operating expense costs for the year by the number of pieces of glass installed in that year. Add that number to the job direct wage cost and you will have the operating expenses for that particular installation. See Figure 2 for an example of how a typical job cost breaks down.
To become more profitable, you have three choices: increase your revenue per job, reduce the COGS or reduce operating expenses per job. To increase your revenue, charge more for parts and labor. Define your pricing based on your cost of doing business, plus a fair profit. Choose the jobs you accept, being careful to avoid those where your profit will be negligible. Take advantage of opportunities to up-sell customers with add-on products such as side- or rearview mirrors or wiper blades. To reduce your COGS, negotiate better pricing from suppliers and take advantage of bulk purchasing programs.
Operating expenses are the only piece of the puzzle that you have complete control over. To reduce labor expenses, be sure to provide your workers with state-of-the-art equipment and training so that they can maximize their efficiency on each individual job without sacrificing safety or integrity.
Carefully analyze other operating expenses such as utilities, rent, insurance and professional services. Look for areas where you can cut corners. If you provide health insurance, for example, see if you can join a larger group to bring down your premiums. Take advantage of free business banking at your local bank.
Market to the consumer. Explain the safety aspects of auto glass installations, the importance of your technical training and why you are the single best person to handle their installation.
We’re all in this business to make a profit. How much of a profit we make is up to us. Understanding our costs and how they affect our bottom line is key to being successful in the auto glass industry. How does your income statement stack up?