JUST ONE THING
Using the Right Labor Rate to Calculate Profit
Episode 90
With Rick White, 180BIZ
You know, we've been talking about labor rate. In this episode, I’ll talk more about the frustrating part of setting your labor rate. And that is when you put a profit model in place and you don't hit it. The reason is that you're not using the right labor rate.
Most shops compare their cost to the posted rate. That’s useless because your posted rate isn't what you collect. Your effective labor rate shows what you collect. But how do you calculate that? By dividing your labor sales dollars by the number of hours sold for the same period. That will give you an amount that is always less than what your posted rate is. That’s where the frustration comes from.
So, when calculating what you want your profit to be make sure you're using your effective labor rate as the calculator. That will make all the difference in the world. You will see more profit in your business than you ever have.
How do you do that? The easiest way to do that is to watch the Pocket Business Genius webinar I just did last week titled How to Calculate Your Labor Rate. It goes through all the math step by step.
But I'll verbally go through it with you here.
Figure out what your cost per day is. Then divide that by 0.25. If you want a 75% gross profit rate. That will be your target sales per day. Then divide that by your average hours sold per day. That will show you what your target effective labor rate has to be for you to hit your gross profit goal.
Now, you can see where you are now. And then see what your effective labor rate needs to be to achieve your desired gross profit goal.
The easiest way to figure out what your post rate needs to be is once you've figured out what your effective labor rate is, divide it by your posted rate and it's gonna give you a percentage. Then divide that amount by the percentage of your effective labor rate. That will show you how to get your target posted rate.
If this does make sense to you, that's fantastic. If not, reach out to me, [email protected] and I will be happy to put something together so that you can run those numbers pretty quickly and it will be able to tell you exactly what you need to do.
But for now, it’s important to understand that you must charge effectively. You must charge what you are worth. You must charge what you need to attract great people to your shop. You can't keep paying technicians peanuts. You also can't pay technicians a lot of money and absorb the cost. This is a trickle-down economy.
Unfortunately, due to the technician shortage, you will begin to see labor rates go crazy. Why? Because technicians will be paid $70 or $80 an hour if they're any good. That will become a fact of life. At least for the next four to five years.
On the flip side, the cool thing is when people see the potential income that can be made in this industry, we'll see more people entering this industry now more than ever. But we need to change our game too.
Take a look at the last three to four blog posts to set your labor rate using a calculation and not an emotional response.
Thank you very much for being here. God bless. Stay safe and go create some abundance.
