Gross profit

Gross profit is what a repair order keeps after the parts cost and the technician's wages come out, measured before any of the shop's overhead. It answers one question: did this ticket pay for itself and leave something behind.

How is it calculated on a ticket?

Sale price minus cost of sale. On a job that sold for a thousand dollars with three hundred in parts cost and two hundred fifty in technician wages, the gross profit is four hundred fifty dollars. Divide that by the sale and the gross profit percentage is 45%. The IRS sets out the same arithmetic for any small business in Publication 334: "subtract the cost of goods sold (line 4) from net receipts (line 3). The result is the gross profit from your business."

Rent, insurance, the front counter's salary and the loan on the alignment rack all sit below this line. They come out of what gross profit is left at the end of the month, which is why a shop can be busy, be growing and still lose money on volume that carries thin gross.

The tax form draws that line in the same place. Schedule C reports "Gross profit. Subtract line 4 from line 3" at line 5 and "Net profit or (loss). Subtract line 30 from line 29" at line 31, with the expense lines for insurance, rent and wages sitting between them.

Which percentage is the report showing?

Margin, on a profit and loss statement, which is gross profit over the sale. A parts matrix is written in markup instead, which is gross profit over the cost, so the two screens report the same transaction with two different percentages on them. Get the conversion straight once in the entry on the difference between markup and margin and then price from the number your own statement speaks.

Why track parts and labor separately?

Because they break for different reasons. Parts margin slips when a matrix stops matching what suppliers charge, when cores go back late, when somebody buys a part at retail down the street to save a job. Labor gross slips when work gets quoted under what it takes, when overlap gets subtracted twice, when a technician's hours go onto a job the shop never billed.

A blended number moves half as much as either half and points at nothing. Two numbers side by side tell a shop which conversation to have this week.

Where does gross profit leak?

Down five holes, none of which appear on a report with their own name.

• Cores that never went back. The deposit sits on the account as a charge and the core charge billed to the customer was collected against a refund that will never arrive. California spells the mechanism out on the one core every shop handles: a replacement lead-acid battery sold without a trade-in carries a refundable deposit, the dealer has to "display the amount of the deposit separately on the receipt", and the money goes back when the old battery does.
• Freight, especially on a rush order that a writer absorbed to save the sale. The IRS counts freight-in on merchandise a business buys for resale as "part of cost of goods sold", so the money has left gross profit whether or not the ticket ever named it.
• Comebacks. Labor paid twice, revenue once.
• Retail parts purchases on a hot job, made at a counter price nobody re-quoted before invoicing.
• Discounts at the front desk, given a hundred dollars at a time by somebody who does not see the month.

Each one is small on its own ticket, and none of them appears on a report under a name anybody would recognize.

Finding them takes a habit rather than a report. Pull ten closed tickets a month at random and compare what was quoted against what the supplier invoiced on each one. The pattern that turns up is worth more than any dashboard, because it names the specific place the money left.

What number should an owner watch weekly?

Gross profit dollars per repair order, next to the percentage. The percentage alone punishes a good month full of engine work, since a large parts job adds real dollars at a lower ratio. The dollars alone reward selling anything at any price.

Read them with average repair order and the picture closes. A rising ARO with falling gross profit dollars means the shop is selling bigger tickets and keeping less of each one, and that points at parts pricing before it points at anybody on the phone. Fixing it starts at the matrix.

Split the weekly read by department while you are there. Labor gross and parts margin move for different reasons on different timescales, so a blended figure tells an owner that something happened and nothing about where. Two numbers on the same page name the conversation to have on Monday, and they take the same ten minutes to produce as one.

Back to the glossary, or read how an estimate gets priced.