JUST ONE THING
The 4 Numbers Needed to Set Your Labor Rate Properly
Episode 89
With Rick White, 180BIZ
I’m going to talk about four numbers, today, that you need to know to set your labor rate properly.
1. Your desired NET PROFIT. Stephen Covey suggests beginning with the end in mind. Before you can do anything, you must decide on what your profit model looks like. What is your net profit going to be? Let's face it, with most businesses, generally, profit is what's left over. It’s what’s left over after you pay for everything. I have a real problem with that. You need to have a plan for your profit. Make sure that it's worth getting out of bed in the morning. If you could make more money working for someone else, why bother with your place? Know your Gross Profit. Why should you care what you make in parts GP, Labor GP, etc? It's, it's not to pay the bills. It's not even charged properly. It is to make sure that you're getting the net profit that you want and need for your life, for your business, and for your dreams. That's important. So the first number you need to know is your net profit model. What is your desired Net Profit target?
2. Then the second thing we need to do is figure out what you want for GROSS PROFIT. So most of the time when you're working on this, you will have numbers as percentages that will be your target. So, let's say you have a target of 25% net. That's doable. You might be thinking, “Holy cow, that's a lot!” But it's doable. Let me show you how. If you have a 25% net and you have 40% in expenses, then, you need a 65% gross profit. If you have 65% gross profit with 40% expenses, you will get 25% net. That is amazing. So, you must know your gross profit target. Then break it up. Most people stop right there. They stop at gross profit. They say, “Oh, that's all I want. I want 65%.” And then they walk away. At the end of the year, they're so disappointed and hurt because they didn't hit it, but it's because they didn't have a plan for it. Understand the different income streams, your parts, your labor, your sublet, supplies, fees, etc. Then have a profit plan for each income stream which will help you achieve the target gross profit. And this is where the labor gross profit comes in. Now you need a target gross profit for labor. I believe it should be 75%. That's a pretty cool number.
3. Many shop owners tend to set the gross profit target using their labor rate and cost of labor. Then they go through the year and miss their target. Why? It's because they’re not calculating it properly. Instead of using the cost of labor to the posted labor rate, calculate your labor gross profit percentage by dividing the cost by your EFFECTIVE LABOR RATE. Your effective labor rate is the amount you're collecting per hour. It's an easy number to figure out. Divide the labor sales dollars for a given period by the hours sold for that same period. That will show you your effective labor rate.
There are a bunch of things that can impact the effective labor rate. Canned jobs, oil services, alignment, and stuff like that. For example, let's say you give your tech a half hour to do an oil service. You won’t charge your client a $50 or $60 labor charge. You need to understand what your effective labor rate is. And then calculate your labor gross profit from that number.
4. There is one other number you need to know. What is your COST OF LABOR? And I’m not talking about what you can afford. I’m talking about what will the cost of labor will be the next time you hire.
Sit back and start to think about your net profit and what you want it to be. What is your gross profit target? What should those numbers be so that you can achieve your dreams, stop creating a paycheck, and start to create a business? This thought process will help you to do just that.
Take care. Thank you so much.
