Computing Margin and Markup (tire shops)

Last Updated on 24.08.2023 by hrushetskyy

COMPUTING MARGIN

Gross profit margin aka gross profit or gross margin is the difference between net sales (total sales minus any discounts and/or returns) and the cost of those sales. For example if:

Net Sales                                                  =       $1 000

And Cost of Sales                                      =       300

Then Gross Profit Margin                            =       $700

Gross profit margin can be expressed in dollars or as a percentage. As a percentage the GP margin is always stated as a percentage of net sales. The equation is: (Total Sales Cost of Sales)-*- Net Sales. In the above example the margin would be 70 percent ($1 000-$300)-*-$1 000. (We assume total sales and net sales are equal here i.e. no discounts or returns).

When all operating expenses (rent salaries utilities insurance advertising and so on) and other expenses are deducted from the GP margin the remainder is your net profit before taxes. If the GP margin is not sufficiently large there will be little or no net profit left.

Some businesses require a higher GP margin than others in order to be profitable because the costs of operating different kinds of businesses can vary tremendously. If the operating expenses in one line of business are comparatively low then a lower GP margin will still yield the owners an acceptable profit.

The following comparison illustrates this point. So that you are not confused keep in mind that operating expenses and net profit are shown as the two components of GP margin i.e. their combined percentages (of net sales) equal the GP margin.

	Business A	Business B
Net Sales	100%	100%
Cost of Sales	40%	65%
Gross Profit Margin	60%	35%
Operating Expenses	43%	19%
Net Profit	17%	16%

In the first example the cost of sales (40% of net sales) is lower than in the second example (65% of total sales) leaving a higher GP margin (60% vs. 35%). But because operating expenses are also higher in the first business when they are deducted from GP margin they leave a net profit that’s comparable to that of the second business.

COMPUTING MARKUP

Markup and (gross profit) margin on a single product or group of products are often confused. The reason for this is that when expressed as percentages margin is always figured as a percentage of the selling price while markup is traditionally figured as a percentage of the seller’s cost. The equation is: (Total Sales Cost of Sales)-s-Cost of Sales.

Using the numbers from the preceding example if you purchase goods for $300 and price them for sale at $1 000 your markup in dollars will be $700. As a percentage this markup comes to 233 percent ($1 000 $300)-s-$300. In other words if your business requires a 70-percent margin in order to show a profit your average markup will have to be 233 per-cent.

You can now see from our example that although markup and margin may be the same in dollars ($700) as percentages (233% vs. 70%) they represent two different things. More than a few new businesses have failed to make their expected profits because the owner assumed that if his markup is X percent his margin will also be X percent. This is not the case.

Markup Table   

The following table shows what the markup on cost must be to give the desired gross profit margin in a number of common cases. To use this table find your G.P. margin percentage in the left-hand column. Multiply the cost of your product(s) by the corresponding percentage in the right-hand (markup) column. The result added to the cost of your product(s) gives the correct selling price.

Margin Percent of Selling Price	Markup %of Cost	Margin Percent of Selling Price	Markup %of Cost	Margin Percent of Selling Price	Markup %of Cost
Percent of	%of	Percent of	%of	Percent of	%of
Selling Price	Cost	Selling Price	Cost	Selling Price	Cost
4.8	.5.01	18	22	32	.47.1
5	.5.3	18.5	22.7	33.3	50
6	.6.4	19	23.5	34	51.5
7	.7.5	20	25	35	53.9
8	.8.7	21	26.6	35.5	55
9	10	22	28.2	36	56.3
10	11.1	22.5	29	37	58.8
10.7	12	23	29.9	37.5	60
11	12.4	23.1	30	38	61.3
11.1	12.5	24	31.6	39	.64.0
12	13.6	25	33.3	39.5	.65.5
12.5	14.3	26	35	40	.66.7
13	15	27	37	41	70
14	16.3	27.3	37.5	42	72.4
15	17.7	28	39	42.8	75
16	19.1	28.5	40	44.4	.80.0
16.7	20	29	40.9	46.1	.85.0
17	20.5	30	42.9	47.5	.90.0
17.5	21.2	31	45	48.7	.95.0

PERSONNEL WHOM TO HIRE HOW MUCH TO PAY

In most small shops the owner acts as manager as well. Often the manager does most of the selling too. If there is significant volume the manager has someone do the selling and takes care of ordering the entire inventory. A tire manager getting in the $1 200 to $1 400 monthly salary ranges are pretty well paid in most areas. A book keeper receptionist handles the paperwork and runs traffic from payment counter to shop. Look for someone with an eye for detail paying from $5 to $6 per hour in most areas.

Tire installers are referred to as general service personnel in this industry. What you pay them depends on how fast and how good they really are. Some can put four tires on in ten minutes. This kind of installer will command more money than the guy who takes 45 minutes to an hour. Typical installation time is 1/2 hour for most cars. A starting wage of $5 is quite fair for most general service personnel. More experienced ones which have good managerial potential may come in at $7.50 or so. Compare these figures with customary wage scales in your area for this type of work.

Ideally you would want to have one general service person for each bay in your shop but this is not always possible. Like everything else in the tire business hiring is based on volume. Some experts we interviewed recommended the following rule of thumb when hiring: that ideally you should make $10 000 per full-time employee. That is if you have four people in the shop and two in the office you need $60 000 in total volume per month to maintain a good profit line.

Assuming that each tire is installed for an average of $50 at retail you need to move 1 200 tires on 300 cars per month to justify a four-person crew a bookkeeper and yourself as manager-inventory controller. This works out to about six cars per day relatively few in one shop. Nor does this take into account income from ancillary products and services such as batteries or work on brakes or front end. This means as volume warrants you won’t need to add crew right away. The first person you need to hire is a manager who monitors inventory and oversees day-to- day operations while you spend your day building the business through your marketing efforts.

One thing that may affect your hiring is the time your shop is open. As we’ll see it makes sense for tire stores to open early before work and stay open late after work as well as stay open at least one day on the weekend. But individual general service personnel and indeed everyone else except you will only work 40 hours a week. You may therefore wish to offer split shifts or part time work to your staff so that you can be sure to have enough workers on hand. Scheduling your staff will be somewhat by trial and error in the start-up phase. Once you see where your volume is going you may have 3 1/2 or 41/2 people in your store spread out over the week and weekends.

HIRING PERSONNEL

Hiring is a task that frightens most business owners. There is the fear of being cheated or burglarized, the fear of a job not being done or being done poorly, the fear of employees becoming competitors. These common fears prevent you from attaining success. Every business owner has experienced them. But they will be infrequent occurrences if you use your common sense when hiring.

Many new business owners become married to their businesses never enjoying a few days off or taking a vacation because they will not trust the work to someone else. In some cases businesses fail to move to high income/profit levels because no assistants are hired. Start hiring. You will never make a lot of money without other people to help you.

Recruiting employees for a small business is usually limited by geography and is sometimes further handicapped because the best local talent may prefer employment in larger and better-known companies. By paying competitive wages and stressing promotional opportunities or a better chance to learn the business you can offset this handicap. Aggressive solicitation and the selling of your company can further lessen some of these limitations and help secure an adequate supply of the right type of job applicants. Strive to create a public image of your tire dealership as a good place to work.

Don’t look for potential employees among your friends and relatives. Remember if a friend or relative does not work out as an employee and you have O U. him go you lose both an employee and a good relationship.

No employee is perfect. Don’t expect to find someone to work for you who fill all your needs in every respect. You must compromise and be satisfied with people who have most of the qualities you’re looking for. Pay them what the market requires with significant increases once they’ve proven themselves. Two well- paid motivated capable employees will serve you better than three mediocre lackadaisical underpaid ones.

If an employee fails to perform as you expect and you cannot get him to change by pointing this out to him let him go. Weak employees hurt the morale of others who carry their share.

Before hiring anyone you should write down the following:

1. A job description including the objectives of the job the work to be performed responsibilities working conditions and relationships to other jobs.

2. The job specifications that is a description of the qualifications required to fill the particular job including experience education special skills and any physical requirements.

Once these things have been decided you are prepared to interview prospective employees.

GOOD PERSONNEL POLICIES

Don’t limit employee applications to people who happen to stop in and ask for jobs. Go out and recruit at schools and universities (which maintain job placement bureaus for their students) at established government and private employment agencies through referrals from friends and other business firms. Advertising in newspapers or trade publications can be effectivebut usually only if the position requires very special training and if advertising expense is reasonable.

Each applicant should be required to complete a detailed application form and give references. Then check each reference carefully. These could be important if the employee turns out to be a thief or embezzler.

Conduct an extended interview with each qualified applicant in pleasant surroundings with the application in front of you. The interview should enable you to rate the applicant. Those at managerial level require a more extended interview wage employees need much less time. Direct the discussion into various channels to find out as much as possible about the person.

Essentially you need to know how reliable and “trouble-free” the applicant will be as an employee. It is of course important that he or she have a personality compatible with those of your other employees. Allow the applicant to talk freely and listen carefully for negative attitudes. If not already known discuss past wages or salaries and expected compensation.

Keep salaries in line with the competition or better if this can be justified. Have a merit system of pay raises within a rank to be put into effect if they are earned. Be sure all employees know the salary ranges available to them if they are promoted. Provide an annual review of each employee’s progress and productivity. Reviews should be discussed with employees so that they know how they stand with the company.

PERSONNEL PROGRAMS

Besides considering what your employees want from their jobs and how you can achieve the goal of an efficient happy and productive staff you must recognize the legal framework within which all personnel policies operate. Personnel programs are not left to the sole discretion of business owners in the modem world. Even well-intentioned policies that proved successful in the past may run into conflict with a barrage of legal regulations by which all employers must abide.

Chief among the governmental regulations for employers today are the minimum-wage laws fair-employment regulations the rights of employees to collective bargaining and to form their own unions requirements for withholding income taxes and other items from employees’ paychecks for the federal government and public policy regarding equal opportunity, before you begin hiring check the current status of these governmental regulations with your local state employment department.

Fringe benefits health and hospital insurance profit-sharing plans pensions and paid vacations are all part of a complete personnel program. All successful business owners must recognize that fair wages attractive fringe benefits desirable working conditions and concern for employees are important parts of building a dedicated and efficient staff. Such a staff will advance your business goals and by word-of-mouth create an image of your tire dealership as a good place to work.

Build Employee Morale

Authorities on business leadership agree that a significant factor in a business owner’s success is the ability to accept and use the ideas of the company’s employees giving them full credit if the idea is successful. This encourages employee contributions and cooperation and creates a true group spirit of aggressiveness and accomplishment.

Employee morale and team spirit are important to the success of any business. Here are suggestions for building them:

1.         Tell and show your employees that you are interested in them and welcome their ideas on how conditions might be improved.

2.         Treat your employees as individuals never as impersonal cogs in a working unit.

3.         Improve your general understanding of human behavior.

4.         Accept the fact that others may not see things as you do.

5.         Respect differences of opinion.

6.         Give explanations for management actions when possible.

7.         Provide information and guidance on matters affecting employee security.

8.         Make reasonable efforts to keep jobs interesting.

9.         Encourage promotion from within.

10.       Express appreciation publicly for jobs well done.

11.       Offer criticism privately in the form of constructive suggestions for improvement.

12.       Train supervisors to think about the people involved rather than just the work whenever possible.

13.       Keep your people up to date on all business matters affecting them and quell rumors with correct information.

Good employees will demand and rate fringe benefits such as paid group health insurance and vacations. Group insurance is easy to acquire and will start at about $75 per month per employee. As owner you can receive company-paid insurance and hospitalization if you provide them for your employees. Your insurance broker will handle the group insurance.

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