Profitability Definitions

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Profitability Definitions

 

Overview

Here are definitions of a couple of terms used in the Profitability module.

 

Net Operating Profit

Net operating profit refers to the amount of money that a company has earned after the cost of goods sold and operating expenses have been deducted. This is used to see whether a company is making more than it spends or is operating at a loss. Net profit also is referred to as “the bottom line,” because it is usually shown at the bottom of an income statement.

The net profit margin percentage is a related ratio. This figure is calculated by dividing net profit by revenue or turnover, and it represents profitability, as a percentage.

Net profit ($) = Sales revenue ($) – Total costs ($)

 

Effective Labour Rate

Most service advisors earn their pay based on the number of labor hours they sell.  But due to the prevalence of service menus and other forms of discounting, increasingly the focus is shifting from merely selling hours to selling them “effectively.”  As a measure of this effectiveness, the industry uses the term Effective Labor Rate.

Effective Labor Rate (ELR) is labor sales dollars coming in from the customer divided by the flat rate hours paid out to technicians. The key word here is paid to the technician for getting the work done.

ELR is not calculated in terms of hours billed to the customer. The dollars coming in divided by the money or the flat rate hours [actually] paid to the technician is where the real true formula for effective labor rate is at.

 

Margin

Margin = (cost – selling)/selling

 

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