Shop Equipment ROI – Tooled for Profit

Shop Equipment ROI – Tooled for Profit

If you understand the basic idea and process of calculating ROI, it can help you make good purchasing decisions.

I’m not a financial scholar by any means, but I know what return on investment (ROI) is. It’s a mathematical formula that yields a representation of the profitability of any type of investment. In the automotive repair industry, we primarily associate this with equipment. Admittedly, I’ve never used the term much, more often approaching things from the standpoint, “Am I making money with this or not?” As technicians and shops, our typical thought process centers on each individual job, how much time and money we have into it, so we’re used to thinking profit or loss, and also pretty good at knowing if we made money, or if we lost our “back quarters.”

But over time I’ve learned that the thought process alone is not always the best approach, and making money doesn’t necessarily mean a good ROI. Even if you don’t go crazy with an exponentially long, complicated equation, if you understand the basic idea and process of calculating ROI, it can help you make good purchasing decisions. The base calculation would be dividing your net profits by the cost of the equipment. That’s your ROI. Then, if you want to take it further, you can divide that number to get a time-based ROI average.

Let’s look at a basic calculation. You buy something for $10, then sell it for $14. Your profit is $4. Divide profit by investment, ($4/$10) and you get an ROI of 40%. Not bad, but if it took two years to make this profit, then your ROI would be 20% annualized, which is not as impressive. You can use this basic formula to compare products you sell as well, and it may help you decide what’s best to keep in stock or not.

Now let’s try something with equipment. You have an old tire machine that’s paid for. You average one set of tires per week and it takes 1.5 hours to complete the job. You decide to buy a new tire machine that is much quicker and more efficient but it cost you $20,000. Now the same job only takes one hour. Based on the cost of technician salary, you calculate that it saves you $30 per job with this new equipment. In this case you would use the formula: savings (additional profit)/investment. At one set of tires per week, that works out to $1,560 per year. $1,560/$20,000 equals an ROI of approximately 8%. That’s not too good. It will take you almost 12 years to pay off the new machine.

On the other hand, if you average five sets of tires per week, then your additional profit for the first year is $7,800. $7,800/$20,000 equals an ROI of 39%. That’s pretty good. A general rule of thumb is to pay off any piece of equipment within two to three years. This puts you right on track.

But now, here is the problem. This is where we throw the proverbial wrench into the plans. Equipment is tricky. You should also calculate in installation and maintenance costs, as well as the cost of training for the new equipment, and factor in how long the equipment is going to be relevant. This is an especially important factor when considering a scan tool, the required updates and how long before it’s potentially obsolete. In the case of a tire machine, you can also calculate in savings from other benefits of a new machine, such as no more damage to wheels or tire pressure monitoring system (TPMS) sensors, which the new machine can eliminate.

Some of this can be overwhelming, and it makes me realize why it’s easier just to fly by the seat of your pants and wonder, “Am I making money or not?” It’s an important business aspect, however, to know what is behind the idea because it can benefit you in so many ways. Even without math, you can almost visualize the numbers in your head.

I’ll try it by leaving the formulas out to decide whether it makes sense to buy a dedicated TPMS tool when you already have a full-function scan tool with TPMS ability.

If you get a TPMS problem every day and you use your full-function scan tool to diagnose it, most likely it takes much longer to boot and longer to navigate to the function. Even then, it may not cover all you need. Because there’s such a vast amount of information that a full-function scan tool has, it simply takes more for the manufacturer to keep everything current. Plus, you often must still rely on service information for certain procedures and then, if it’s the only scan tool for your shop, it ties it up for use in other diagnostics.

Now, let’s compare that to a dedicated TPMS tool. Built with only one function in mind, they can make the process much quicker, have greater coverage, boot quicker and quickly walk you through all steps of any required TPMS resets. When you factor in the savings in time and the fact that your primary scan tool isn’t tied up, you can prove the value of a dedicated TPMS tool through ROI calculations. On the other hand, if you rarely work on TPMS systems, you can prove it wouldn’t make sense at all, since you do have the function on your primary scan tool.

While you haven’t done any calculations, you’ve thought of it in that manner and can picture where the calculations might end up. If you’re on the fence, the math will give you the answer. Ultimately, your accountant could take the idea even further, with an undoubtedly more advanced knowledge of ROI, and almost certainly a way to calculate depreciation into the formula. That’s where I sign off, but you get the idea. It’s a great concept that represents fundamental business financials.

Mobile Diagnostics

There are other ways that ROI calculations can help you make business decisions. There’s a lot of talk in the industry about mobile technicians who come to your shop to diagnose one specific problem. We also now have a variety of options available for remote tech assistance and computer reprogramming services.

Calculating ROI from equipment that would allow you to perform these services in-house can be an easy way to determine if you can justify purchasing the equipment or if it makes more sense to utilize mobile and remote services.

More than Math

Now I want to shift gears with a non-traditional viewpoint on ROI. For me, it’s more than math, more than a number. That’s only half of it. In our business we invest in equipment, the first half, but we also invest in people, the second and perhaps more important half.

Without the people in our business — from our technicians and staff all the way to our customers — we wouldn’t be successful, so we must look at ROI from a standpoint of both. Technician retention is a subject on the forefront of almost every shop, and the longer a technician works at a shop, the higher the ROI for that technician.

What keeps technicians at a shop? From a technician standpoint, we want to use modern equipment that allows us to perform our jobs safely and efficiently. If our performance and paycheck is determined by flat rate time and we’re stuck with outdated equipment that hinders our productivity, we’re probably not going to be around very long.

We also want an atmosphere that is generally clean, comfortable and safe. We want a clean break room to eat lunch and somewhere to get away from the bay for a few minutes during the day. These are all important factors, and sure, we know we’re not working at a flower shop, but we also shouldn’t be in the trash compactor on the Death Star.

We also need the opportunity for training and skill advancement. This can be an investment in time and money for a shop, but it’s important for everyone.

How does all this factor into ROI? Mathematically it might be difficult, but the better the atmosphere and the better the opportunity for technicians, the higher their morale, which quite simply adds up to better productivity. Technicians make more and the shop makes more, which you can add up quickly.

The return doesn’t stop there. Investing in modern equipment, investing in your technicians and providing advanced services for your customers is a way that you are investing in them. More than ever, customers understand technology. Maybe not the “bells and whistles” of it, but they understand what technology can provide.

When you share the details of the modern equipment you have with your customers, they will realize your commitment to providing them with a quality, consistent service. Spending time with your customers to explain the problems with their car, explain the future maintenance and the costs of repair are all investments in them. Building this rapport with them, means they will return to your shop the next time they need service. And that means they will invest in their car, your shop and your future. TS

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