If you want to become a car wash manager or are new-to-industry looking to build your first car wash, there are a number of financial concepts you should become aware of.
Service-based businesses calculate sales revenue by multiplying the number of customers by the average service price.
Average service price is a function of the number of services, price points, and sales mix.
Sales mix is the proportion of sales a single product or service accounts for in a company’s total sales.
Table 1 provides a tabular calculator of average sales for multiple products. Here, if we washed 100 cars, total revenue would equal $1,375 (100 X $13.75).
Table 2 shows an increase in average sales that we might expect from marketing and promotional efforts to get more customers to purchase the higher priced washes. Here, if we washed 100 cars, total revenue would equal $1,475 (100 X $14.75).
Contribution margin is that portion of sales revenue not consumed by variable costs that contributes to overall profit. Margin is calculated by subtracting variable cost from revenue.
Variable cost is costs that changes in proportion with the number of products or services a company produces.
This includes credit card processing fees, chemical, utilities, equipment maintenance, and customer claims.
Operating expenses are expenses incurred from normal business operations such as advertising, insurance, rent, property tax, payroll, and building maintenance. These expenses are typical fixed from period to period.
Net operating income is calculated by subtracting operating expense from the contribution margin.
Net operating income measures profitability before adding in any costs from financing or income taxes.
Non-operating expenses are unrelated to business operations such as interest expense and principal payments on loans, and depreciation.
Depreciation is a non-cash expense that accounts for the decrease in value of building and equipment each year as they are used and wear out.
Net profit is the amount of money left over after subtracting out all expenses.
Profit margin represents a company’s net income divided by revenue or 25 percent ($250,000 EBTD / $1.0 million revenue) X 100.
Stringing these concepts together, we can create an income statement also known as profit and loss statement.
An income statement shows how profitable a business was over a period of time typically by month or year.
It shows revenue minus expenses and losses.
An income statement can be used to prepare an analysis such as determining a company’s breakeven point, debt service coverage, and return on investment.
Breakeven is the point where total cost and total revenue are equal. In other words, it is number units or sales dollars required before the company can make a profit.
Breakeven in units is calculated as fixed cost/(price per unit – variable unit cost).
Using information in Table 3, variable unit cost is calculated by dividing variable cost by car count or $2.50 ($250,000/100,000).
Fixed cost is operating expense plus non-operating expense or $500,000 ($250,000 + $250,000).
Thus, breakeven units is 66,667 cars ($500,000/($10.00 – $2.50)) and breakeven sales dollars is $666,670 (66,667 units X $10.00 price).
If there are 312 good weather days a year, the company would need to wash 214 cars a day, on average, before it makes a profit. This underscores the importance of being ready to wash as many cars as possible on any given day. After all, you can’t make up tomorrow for what you didn’t wash today.
Debt service coverage ratio (DSCR) measures a company’s ability to repay loans or take on new financing. DSCR is calculated by dividing net operating income by total debt service or 2.0 ($500,000 / $250,000). Most lenders want a borrower to have a DSCR of 1.25 or more.
Return on investment (ROI) is a ratio that compares gain or loss from investment relative to its cost. ROI is net return on investment divided by cost of investment times 100. If investing in a car wash, ROI is most useful for comparing alternative investments.
Given prominence of monthly subscription programs in the car wash industry, it is also important to understand the cost of acquiring and losing customers.
Customer acquisition cost measures the total sales and marketing cost to acquire a new customer. Acquisition cost is calculated by dividing sales and marketing costs by the number of new customers acquired during the period.
Churn rate is the percentage rate at which customers stop buying products and services or stop subscribing to a loyalty program. Churn rate is calculated as the number of members lost during the period (e.g., month) divided by number of members at the start of the period times 100.
Today there are sensors, software, and applications that crunch the numbers and give answers with a touch of a finger. Nevertheless, if you do not understand basic principles of finance and accounting, it’s very difficult to run a business or hope to help a business grow and profit.
Bob Roman is a car wash consultant. You can reach Bob via e-mail at bob@carwashplan.com or by visiting www.carwashplan.com.