Years ago, one of my journalism mentors gave me some advice. “You can’t manage what you don’t measure,” he told me.
“That’s a catchy sentence that might work in an article someday,” I thought to myself. I didn’t realize at the time how valuable his advice would become. The concept would ultimately prove useful in both my career and my life.
It’s true: You can’t manage yourself or others, or anything else for that matter, until you take some basic measurements. Want self improvement? Take inventory of your strengths and weaknesses. Want to manage your staff better? Size them up. Determine their likes and dislikes, their successes and failures. Then, start to manage those components. Work on weak spots and enhance strong suits.
Same goes for business. As an independent tire dealer, you don’t have a large, impersonal corporate accounting department feeding you financials every month. You don’t have “company-wide targets” clearly dictated to you each quarter. No, you’re on your own. So, how do you know if you’re truly profitable? Hint: Having a few dollars left in your pocket at the end of the month is not technically a sign of profitability.
As you might expect, measuring is a numbers game. Call them ratios, formulas, benchmarks or key performance indicators (KPIs). No matter. Whatever you call them, numbers create the measuring stick by which you size up your business. And there are literally hundreds of possible numbers that a typical tire dealer can use to measure his or her business. For the purposes of brevity, just a few of the most common ones are covered here. An accountant, retail analyst or business management consultant can provide information.
First, before measuring can even begin, a business manager – that’s really what an independent tire dealer is at heart – must understand a concept that seems quite obvious: Profitability is determined by profits, not sales. Though it may seem apparent, it’s still worth noting that sales, while obviously affecting profits, do not always make for profitability. Profits are ultimately dependent on every single facet of business, from payroll to building costs to supplier contracts.
That’s a lot of data to collect and process, so it might be practical for a dealer to start with small, relatively simple measurements. Consider gross profit (GP), possibly the most common measurement businesses use to determine profitability. Put simply, GP are those dollars remaining after direct costs for sales are paid, according to Tony Passwater, president of consulting and training firm AEII. For a tire dealer, GP would include the dollars collected from the customer for a tire, less the dollars paid to the supplier. Direct costs often include shipping or delivery expenses, as well, says Passwater.
GP is typically reported as a percentage rather than a dollar amount, making it simple to compare one business’ GP to another’s, Passwater explains. That establishes a comparison, or benchmark, that helps a company determine how it stacks up to its competitors. To calculate GP percentage, divide GP dollars by the total sale price for an item. For example, if a tire retails for $100, and it cost the dealer $68 (including all associated charges), GP dollars are $32 ($100 minus $68), and the GP percentage is 32% ($32 divided by $100).
Note that items like valve stems, mounting and balancing and any warranty a dealer offers must be considered separately. A dealer should know the GP earned on those items on an individual basis.
To increase GP, a dealer must either buy a tire for less or sell it for more. Tire dealers can apply GP percentages not just to tires, but to service, ancillary items and more. Charging more for service – or cutting associated costs – may increase GP, too. If dealers work hard to provide the best customer experience possible, above and beyond the mega-retailers, presumably customers will be willing to pay for that top-notch service.
Another profitability yardstick closely related to GP is total cost of goods sold, a measurement that takes operating expenses into account and helps determine pricing. When calculating this figure, dealers should factor in wages and benefits, insurance costs, rent, utilities, and more – anything and everything that is a cost of doing business. The percent a tire dealer adds to a tire or service – the markup – should compensate for at least some of the overhead and labor associated with that tire or service.
Other financial measurements retail analysts often discuss include Quick Ratio (cash plus accounts receivable divided by current liabilities), Debt-to-Worth Ratio (total liabilities divided by total equity) and Gross Margin Return on Investment (how much money is returned for each dollar invested in inventory).
Especially when combined with financial benchmarks, operational calculations, too, can help tire dealers determine overall profitability. Unlike financial measurements, operational calculations measure productivity, which directly affects profits. How efficiently a dealership uses its resources – staff, building and equipment – will determine potential profitability.
One commonly used operational measurement is sales per employee, which is calculated by adding up the total sales dollars produced and dividing by total employees.
“This benchmark is used to monitor the total throughput of a facility based on staffing,” says Passwater. Dealers can calculate this number as often as they wish; some consultants recommend daily measurements, others, monthly. Regardless of how often it’s calculated, this benchmark can help tire dealers determine what an average employee should be producing in terms of service or retail sales.
It can also indicate when a shop is understaffed. For instance, if your benchmark is $100,000 in gross sales per employee, but you see sales per employee increase dramatically and maintain that level for a sustained period, it is probably time to consider a new hire.
One of the most useful operational numbers a retailer should know, according to several business consultants, is sales per square foot. This metric monitors the total throughput of a facility based on facility space, explains Passwater. To arrive at this figure, a tire dealer would divide total sales by the gross square footage of the building. Trend analysis is where this number really comes in handy. For example, if, over time, expenses are rising and sales per square foot are decreasing, that’s a sign that something is wrong. Determining what that “something” is will require further investigation.
According to Washington-based accountant Pat O’Rourke, the most common reason for poor or declining sales per square foot is excessive space, which leads to unnecessarily high fixed expenses, such as for rent and labor. Of course, there are other reasons a dealership might have a low sales-per-square-foot figure. An unbalanced product mix, insufficient inventory, uncompetitive pricing, poor location and ineffective marketing are just a few.
Sales per service bay is yet another operational measurement tire dealers can apply to monitor the total throughput of the service side of the business. Because extended hours and multiple shifts can make this figure appear low, however, this benchmark is best applied to single-shift facilities at approximately 45 hours of total production weekly, says Passwater. This figure is calculated by dividing total service sales by the number of productive service bays. The end result is the amount of sales dollars produced in each service bay. Hopefully, this number will reveal productivity problems and help determine an optimal turnover pace for the bays.
Numbers at Work
For the data to be meaningful, of course, dealers must compare financial and/or operational figures to those of their closest competitors – or at least to industry averages. Competitive statistics can usually be obtained through a business consultant, retail analyst or by researching public and government sources of data. One Web site that offers benchmarks for many retail and service categories, as well as national averages and operating ratios, is www.bizstats.com, which is run by O’Rourke.
It’s not always practical or even wise, though, for a dealer to compare himself to his competitors. Alternatively, a dealer can track retail numbers over time and apply them only internally, comparing the present profitability picture with past ones. And, for many independent tire dealers – “independent” in more ways than one – it’s more important to gauge how their sales and operational statistics are changing over time, rather than how they compare to the competition.
The numbers game sounds relatively simple, doesn’t it? And the profitability picture is getting clearer with a little definition, isn’t it?
But be forewarned: Data can be dangerous. After doing a few of these calculations and conducting some trend analysis, a tire dealer may discover that the business needs serious improvements in certain areas. That can be frightening. And because numbers will only expose – not solve – problems, that dealer must be prepared to take some action. In the long run, though, that dealer will be better off in terms of profitability. And a little scare now canprevent a major catastrophe later.
Plus, having business data close at hand can give a tire dealer an edge when dealing with suppliers, creditors or lenders.
Overall, the point of collecting all this data and calculating these figures is to improve the overall profitability picture. To do this, a business owner must apply them to the decision making process.
Operational and financial data can help a tire dealer make the best decisions about employee benefits, technology upgrades, equipment purchases and more. It can even help a tire dealer decide whether to sell the dealership or open another location.
In fact, consistent and accurate financial and operational data can mean the difference between vague hunches and educated decisions.
The right information can even turn a wide-eyed student into a seasoned mentor.