Issue Date: Service Manager June 15, 2012, Posted On: 6/18/2012
Special accounting for LOF: Is it necessary? Lube, Oil, Filter services for many shops is a loss leader; at best it results in a few cents of gross profit as many shops are looking to attack the ultra-competitive maintenance market.
Since LOFs are done with no profit in mind, they have a dragging affect on your service numbers. Gross profit declines, hours per repair order suffer and more of your key business indicators can become skewed. But should they be?
That was the question of interest being bandied about on the DealersEdge Professional Management forums.
Obviously, if you or your advisors are judged (and paid) on such indicators, you want LOFs removed from standard accounting calculations. Additionally, a dealership can make their 20-group comparison appear quite heroic by removing LOF cash and expenses.
Let's tackle the pay issue first. Certainly, if you would like to give the advisors a raise then there are easier ways to do that than playing with the accounting. Another issue is that advisors might shy away from writing LOFs or working with low-mileage customers, since they are likely going to have a negative impact on their pay (again, if you are paying in some combination of hours per repair order or gross profit on sales).
Tom Edwards, Fixed Operations Director at Proctor Cars in Tallahassee, FL solved this issue by leaving the LOFs where they were in accounting, but separating them out for payroll considerations. He created a report in his Reynolds system 6910 menu that takes the LOF lines out of the equation. He says it is just like the 3606 sales report, but without LOFs. The nice thing about the report is that it only takes the LOF line out. Therefore, "if there is anything else on the RO, it does not remove the ticket. This lets the advisor upsell the ticket without fear."
Another way to remove the impact of LOFs on your work is to price them out at a full retail amount and then show the "discount" of your competitive pricing below the line. If done with a special discount code or labor operation as set up in your DMS, this will also allow you to track the impact of the LOFs, both plus and minus, by being able to see its impact on your gross profit as well as any resulting upsold work on the LOF ticket.
Tom Ham, of the Automotive Management Network, prefers this method as well. He says, "One can put those discounts wherever they want. Doing it this way shows how much parts and labor the tech really performed. The tech didn't discount it, the business did. The situation is what it is and the tech and service advisor compensation should be adjusted according to reality."
But this method is not without its detractors. Essentially, you are changing the numbers to give a rosier picture than really exists. If this helps you focus attention then it is worth the effort. But it can be damaging if it leads to the shop becoming delusional about their true profit picture.
11 steps for preventing a potential W-I-P nightmare
If your work-in-process balance - a measure of technician's time still in inventory - hasn't been on your radar screen lately, it's time to get it up there. Three big reasons:
First, it's one of just three balance sheet accounts (the others being parts inventory and sublet inventory) that are used to control your dealership's back-end operations. Second, there are many things that can go wrong with W-I-P and the more time that this balance goes unchecked, the harder it will be to identify and correct. Third - and one that's sure to grab your attention: W-I-P write-offs, which decrease dealership profitability, are likely to hit your paycheck the hardest.
"If you're not staying on top of your work-in-process account, it can come as a shock when it's written off to your department. And generally, the service manager bears the brunt - you can't tie it back to the technicians if you wait a long time to reconcile it," says dealership CPA Dave Wiggins, who shared this trio of reasons with us.
Mr. Wiggins, a partner with CPA firm Davis, Keller & Wiggins, LLC, in St. Louis, Missouri, says he has even known service managers who have gotten fired for out-of-control W-I-P balances.
"If the dealer is questioning the service department performance and finds a $65,000 write-off in work-in-process at year-end, that may be the final nail in the coffin," he says. And sometimes a W-I-P fiasco could be the accounting department's fault, not even the service manager's, he says.
Mr. Wiggins, who has seen his share of out-of-control stores, generally looks into W-I-P accounts when their balances exceed $5,000 ($10,000 for larger dealerships with 30 to 40 techs). Two red flags of W-I-P gone awry, he says, are the necessity to make continual adjustments to actual, per the open Repair Order report, or a balance that keeps growing every month because it's not being reconciled and adjusted.
The good news is there are a number of steps service managers can take to avoid work-in-process problems. Mr. Wiggins offers the following suggestions:
Watch W-I-P monthly. Don't wait to do this on a quarterly or annual basis - it'll be more difficult to get your arms around it.
Run the right reports. Run an open R.O. report at the end of each month to see how much your W-I-P balance should be. Dealer management systems use different reports to determine W-I-P at month-end. Ask your DMS provider which reports they can provide and which ones you should run.
Make it a coordinated effort. After month-end, you and your accounting manager should sit down and try to work through problems and reconciliations. Brainstorm on what could be causing the differences in your separate systems. The problem can be as simple as an Accounting mis-posting to the wrong account.
Request W-I-P schedules. Mr. Wiggins estimates that probably just 10 percent of dealerships schedule their W-I-P (break out every item that goes into payroll by R.O. number). Check if your accounting office is willing to do this. Most DMS are capable of setting up payroll by R.O. number, but it can be a difficult exercise with some systems.
Communicate changes. Keep Accounting up-to-date with regard to pay plan changes and incentive/bonus guarantees. Incentives and bonuses should be expensed, not put into W-I-P.
Review service payroll set ups regularly. Make sure people charged to W-I-P actually flag hours. Only productive employees who get billed out on R.O.s should be included here; other people (like service writers and janitors) should be expensed. If an oil and lube guy should have part of his time flagged and the rest expensed, make sure it's handled accordingly.
Keep track of unapplied labor. If a tech is guaranteed 40 hours of work a week but only turns 32 hours, your W-I-P may include 8 hours a week that'll never come through on an R.O. Keep track of non-flagged hours and keep this time out of W-I-P; instead, put it in an unapplied labor expense account. You can do this at month-end or every payroll cycle, depending on your dealership's internal procedures.
Identify and explain unapplied labor. When reconciling W-I-P, unidentified unapplied labor is a problem. If it's within $1,000 ($2,000 on a big store), Mr. Wiggins looks at it again the next month to see if it turns around; maybe it's just timing differences coordinating payroll cutoff with month-end. Or it could be a serious problem. Your CPA firm should be able to meet with you, your dealer and accounting manager to try to work through problems here.
Handle comebacks correctly. You can't bill a customer twice for the same problem and include these labor hours in W-I-P. Try to give comebacks to the original tech and don't pay them for their additional work. If you must assign a comeback to someone else, pay them and subtract payment from the original tech. Make sure Accounting is on the same page on how to handle this based on your service department's policy on handling comebacks.
Put techs on flat rate hours. If it is not a practical arrangement for some employees - new techs may not be efficient yet and it may be harder to attract good techs using flat rate - keep track of flat rate hours compared to actual hours and have the accounting department adjust the amount out of W-I-P.
Keep Body Shop W-I-P separate. Lumping this figure (which can easily run $10,000 to $15,000 because the jobs are much bigger) together with Service W-I-P may keep you from discovering Service problems because it's tempting to attribute a high figure to the Body Shop without checking it out. "It could be a disaster," says Mr. Wiggins.