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Bob's Blog

Bob's Blog

Views from an Industry Veteran

Hello. My name is Bob Klem, and I have been involved in the auto body repair business for 40 years. Some of you may remember the company I started in 1978, KLM Publishing. In 1997 I developed a program called PaintEx to provide better tracking of paint and body materials.

This is my blog - a place where I will share my thoughts on the state of our industry and what I think we can do to improve it.


Markup vs. Gross Margin

Do you know the difference between markup and gross margin? Understanding the difference can save you thousands of dollars annually. In 1958 the Harvard Business Review stated that approximately 90% of all retailers did not.

How do body shops fair with this question? As an example, look at the 50% markup line on the chart, where 50% of the cost is added to the cost to arrive at the selling price. Thus a $1 item with a 50% markup will sell for $1.50. In this case, what is the gross margin? From the table you see that it is only 33%! Don't fall into the trap of believing that a 50% markup is the same as a 50% gross margin!

If your shop needs a gross margin of 50% then you need to mark up the cost by a factor of two. In other words, the price on the invoice should be twice what you paid for the item.

Percent
Markup
  Cost
Multiplier
  Gross
Margin
20%   1.20   17%
30%   1.30   23%
40%   1.40   29%
50%   1.50   33%
60%   1.60   38%
70%   1.70   41%
80%   1.80   45%
90%   1.90   48%
100%   2.00   50%

On Profit Margins

What do you say to the insurance adjuster when they ask you what your profit margin is? Your answer should be emphatic: None of your business. There is absolutely no reason to answer that question. The insurance company cannot compel you to give that information. There is no reason to give them any information on the finances of your shop. Shop financial information is your business, and your business only! The most common reason for the adjuster to have that information is to use it to have a place to start negotiations on the price of the job. You don't need to negotiate the price. Don't play into their hands, don't answer!


To Itemize or Not to Itemize, That Is the Question

Adjusters will tell you that every item that they can think of should be included in overhead. The accounting test is that if the item is "materially significant" in a financial sense it should be itemized on the invoice. Items that are not materially significant can, but don't have to be, grouped together into overhead. On a $1,500 job, a $150 fender is "materially significant" at 10% of the total but a one cent staple is not.

However, any item that can be identified as being used on a job can be itemized to that job. You don't have to put it into overhead if you don't want to. So if a 59 cent piece of sandpaper is used up on a job, it can be an item on the invoice. The insurance company doesn't have anything to say about your accounting methods. So stand up for your business and include every item used on a job.

Overhead is for expenses that cannot be conveniently attributed to a job and are not materially significant. The classic examples are lights and advertising. Some amount of the cost of lighting the shop should be assigned to a job, but the cost that would go into determining that is high, and the amount of electricity used is not materially significant to the repair costs, so it can go into overhead.