Service Department: Operating Expense Problem? Or is it really Gross Profit?
In completing dozens of expense reviews for our dealer/distributor clients, I came across this issue on almost every occasion. When interviewing key managers, more often than not both the service managers and the controller were in agreement that they had an Operating Expense issue in the Service Department. They also were in agreement that they had no idea how to solve the problem. What I discovered on most of the reviews was the issue was not in expense control but was really a service gross profit challenge. Before we get too far down the road let’s define what we mean when we say Operating Expenses and Gross Profit.
As our clients will tell you, Currie has developed a financial model for distribution companies through our research and development projects with manufacturers. From there we have refined the financial model over the years through our experiences with the Currie Best Practices Groups. The Service Department Financial Model is as follows:
| Service Labor Revenue | $ 1,000 | 100.0% |
| Cost of Goods Sold | $ 350 | 35.0% |
| Gross Profit | $ 650 | 65.0% |
| Personnel Expense | $ 200 | 20.0% |
| Operating Expense | $ 100 | 10.0% |
| Occupancy Expense | $ 50 | 5.0% |
| Total Dept. Expense | $ 350 | 35.0% |
| Department Profit | $ 300 | 30.0% |
- Service Labor Revenue is pretty self explanatory. It is the labor charged to customers, whether it is internal, external, contract, warranty, etc.
- Cost of Goods Sold in our model is the wages of the technicians only. In other words, their W2 wages at the end of the year. Included in this should be their pay for vacation, holidays, sick time, etc. as those are true wages.
- Personnel Expense includes the benefits of the technicians (health insurance, taxes, workers compensation, etc.) Do not include vacation, holiday, sick pay, or other wages that are included in COGS. Also in here should be all the wages and benefits of the service overhead staff (managers, dispatchers, warranty clerks, aftermarket sales reps, etc.).
- Operating Expense includes all the expenses that are not either people related or building related. The largest of these expenses include service vehicles, liability insurance, supplies, telephones, etc.
- Occupancy Expense includes all the costs associated with the building/facility of the dealership or branch. Things such as rent/lease, property taxes, property insurance, heat, light, power and other utilities are the major expense items.
This excerpt is Part One of a Two Part series.