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A Current Of Cash

Cash flow. It’s the name of the game in any body shop. That is, in any body shop that wants to stay in business.

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Yet, many shop owners get so caught up in the day-to-day operations
of the shop they fail to devote enough time to cash-flow management.
Though excess cash flow is a pleasant problem, if you fail to
make the most of it, you may one day find that you no longer have
it.

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Some of you are probably asking, "How
can I generate excess cash flow?" While, others of you –
already earning extra cash – are asking, "How can I manage
and invest the cash flow now that I have it?"

No matter how shallow or deep your shop stands
in excess cash flow, the following information should prove helpful.

Generating Excess Cash Flow

Most shop owners would tell you the best way
to increase cash flow is to sell more jobs. However, a jump in
revenues can sometimes have the opposite effect on cash availability.
In order to increase sales, you might have to spend considerably
more money on advertising, buy a new spraybooth, or borrow more
money. As the saying goes, it takes money to make money.

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A good cost/benefit analysis might reveal
that the dollars invested in more advertising or new equipment
will generate sufficient traffic to justify the expense. However,
there are other methods to increase cash flow that don’t require
increased sales.

Here are five practical suggestions that will
immediately enhance your bank balance:

Collect accounts receivable faster.
The typical body shop has a significant portion of its balance
sheets tied up in receivables. And slow accounts-receivable collection
can cause a major drain on cash flow.

For instance, a body shop with $12 million
in annual sales generates about $1 million per month in gross
revenue. If customers and insurance companies are paying 30 days
from the date of invoice, then the shop has accounts receivable
of about $1 million (30/360 x $12 million) at any given time.
If customers and insurance companies generally are 10 days behind
in payments to the shop, accounts receivable would be approximately
$1,333,330 (40/360 x $12 million). This represents a direct drain
of $333,330 on cash flow.

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"The small-business owner should place
a lot of focus on collecting accounts receivable as it has a direct
impact on cash flow," says Brad Moser, a CPA with Gilliam,
Coble & Moser, LLP in Burlington, N.C.

He also points out that good accounts-receivable
management is a two-step process. "All invoices should be
sent on a timely basis," he says. "Many small-business
owners lose cash flow by delaying the sending of invoices. And,
of course, it’s vitally important to follow up with a good receivables
collection program."

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If you’ve been in business for awhile and
have allowed some of your customers or insurance companies to
pay slowly, you’ll have to re-educate them about faster payment.
One way to encourage prompt payment is to assess a late-payment
fee.

Concentrate on improving profit margins.
There are three ways to improve your gross-profit margin (calculated
by subtracting your direct costs from your total sales revenues).
You can raise prices, reduce direct costs or change your product
mix. Raising prices can cause a catch-22 in that you may lose
sales. But if you take a sensible approach to price increases
(i.e. pass along price increases from your suppliers) and stay
in line with the competition, you should be able to periodically
raise the prices of different jobs.

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Tracy Swanson, vice president of Lacey Auto
Body in Olympia, Wash., offers this advice: "Improving gross-profit
margin is a matter of utilizing your buying power and implementing
waste control."

Swanson cites a couple examples in his shop
that have dramatically improved his gross-profit margin. First,
the shop switched from a 50/1 soap concentrate that was purchased
in smaller quantities to a 5-gallon container. Also, the supplier
was given the responsibility of keeping the solution properly
balanced and filled. The result: Waste dropped substantially.

Lacey Auto Body also switched the line employees
from an hourly-wage system to a sliding flat-rate scale. In other
words, the line employees were put on an incentive plan and paid
according to productivity. Swanson says the results were dramatic,
and the number of employees was cut through attrition while output
actually increased.

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Further looking to improve the shop’s gross-profit
margin, Swanson recently added ancillary services. "We are
just now starting a suspension and alignment department,"
he says. "We can make higher margins on this type of job
and take advantage of the 100 percent markup most mechanics put
on parts." (Because the shop is able to utilize its existing
space to offer suspension and alignment, it will realize the full
benefit of the higher gross margin.)

Other ways to improve your shop’s gross-profit
margin include:

  • Job cost every job to ensure its profitability. If you can’t
    make money on a job, don’t take it.

  • Check your control system for ordering parts and materials.
    It’s recommended to centralize this process to ensure efficiency.
    Every shop should have one person dedicated to ordering parts
    and materials. It’s also important to return damaged parts and
    materials immediately.
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  • Change your product mix. Push the more profitable jobs. For
    instance, you’ll make more money painting a Lexus than you will
    an Escort, so you might want to shift some of your advertising
    dollars to better target customers with luxury cars.

    Take full advantage of trade terms. While it’s certainly
    important to pay suppliers in a timely manner, it’s generally
    not a good idea to pay early. Yet many body shop owners pride
    themselves on paying suppliers 10 days before bills are due.

    If you purchase anything on terms or on account, this is one area
    that procrastination pays. Wait until the day a bill or invoice
    is due to pay it. Your cash flow will be enhanced, and your valued
    supplier relationships won’t be harmed because you’ll still be
    paying on time.

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    "Take advantage of the terms your vendors will allow,"
    says Moser. "You don’t want to abuse the opportunity to delay
    payment, but you also don’t want to pay as soon as you receive
    the invoice."

    Control operating expenses better. Often ignored by shop
    owners, intangible operating expenses can drain cash flow the
    most. Telephone service, utilities, insurance and personnel expenses
    can substantially deplete cash flow without the owner even realizing
    it. Shop around for the best long-distance telephone service;
    some great long-distance telephone-service wars have been going
    on over the past few years – take advantage of the lower rates.

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    Utilities expenses can be lowered by minimizing the use of electricity
    and by adjusting the thermostat up or down a few degrees during
    the summer and winter months. In fact, most utilities companies
    offer a free, on-site consultation to help reduce your energy
    usage.

    As for insurance costs, there are several different ways to save.
    Even if you don’t own your building, you still have to purchase
    insurance for your equipment and other contents, as well as for
    workman’s compensation. If you don’t offer life, health and disability
    insurance for your employees, you must at least maintain them
    for yourself. Different insurance companies offer different rates
    for a myriad of insurance services, and a little shopping will
    go a long way in enhancing your bottom line.

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    Personnel expenses can often be the hardest to control and can
    really sap cash flow; however, if you keep a close eye on employee
    downtime and minimize overtime, you’ll see positive results in
    the bank balance.

    Moser says a close eyebe kept on all operating expenses. He suggests
    taking an annual look at the income statements and picking out
    the five biggest-expense items.

    "Figure out which of the five biggest-expense items can be
    cut back during the coming year," says Moser. "In fact,
    you should periodically review the entire income statement and
    ask yourself if some of the expenses are needed at all. For instance,
    if you’re having your facility cleaned weekly, you might be able
    to save a lot of money by cutting back to every other week. The
    same could be true for waste removal."

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    Swanson agrees that controlling operating expenses is critical
    to good cash-flow management. He says the key to reducing operating
    expenses is establishing a budget because you can’t really control
    overhead unless you track it throughout the year. "We put
    a strict budget in place after moving to a new facility, and we
    have reduced our break-even point by 40 percent," he says.
    "A budget is an incredibly powerful tool."

    See your banker. Nearly all body shop owners use outside
    financing to help start or expand their businesses. But many don’t
    realize that banks are sometimes flexible on repayment terms.
    If you’re looking for ways to enhance cash flow, more favorable
    loan terms may be just the ticket.

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    For instance, on a $600,000, four-year loan at 9 percent, the
    monthly payment would be about $15,000. By simply extending that
    same loan to a five-year payback, the monthly obligation drops
    to $12,500. This translates to a monthly savings of $2,500 and
    an annual cash-flow enhancement of $30,000.

    Utilizing cash-management services offered by your bank is a second
    way to enhance cash flow. If your shop isn’t currently set up
    on a cash-management program with a bank, ask your banker to make
    a presentation.

    Some of the cash-management services offered by banks include:

    • Computer-based balance reporting and funds transfer
      – This service allows you to access your business accounts with
      an on-site PC terminal and modem.
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  • Account reconciliation – This is a listing of your
    checks, paid in order of serial number or date, that is available
    on paper, tape, diskette or by data transmission via an on-site
    PC terminal and modem.

  • Automated Clearing House (ACH) services – These facilitate
    electronic funds transfers to replace paper transactions and wire
    transfers. ACH can also be used to initiate debits and credits
    electronically.

  • Automatic investment plans – Also known as "sweep
    accounts," these plans automatically sweep collected DDA
    (demand deposit account) funds that exceed your target balance
    into overnight investments, such as Master Notes and Repurchase
    Agreements, to eliminate service charges. These generally offer
    more-attractive yields than those offered by money-market accounts
    and CDs.
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  • Cash concentration – This service moves funds from
    your company’s accounts at other financial institutions to your
    primary account. This service is ideal for multiple-location body
    shops that don’t have access to the same bank in each location.

  • Controlled disbursement – This service eliminates idle
    balances on deposit in anticipation of checks clearing. It improves
    cash forecasting and earnings potential and provides absolute
    control over disbursements.

  • Lockbox – With a lockbox, the shop’s customers mail
    payments to an exclusive post office box. The bank processes the
    mail, deposits checks, and sends remittance documents and copies
    of the checks to the shop. The deposit amount is reported daily
    to the shop.

    Managing Excess Cash Flow

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    If you already have the pleasant problem of excess cash, you’re
    undoubtedly looking for ways to make the most of it.

    Ken Anderson, who has more than 11 years experience with The Principal
    Financial Group, advises that an effective cash-flow management
    program starts with the objective of the cash. "The first
    thing I ask the business owner is what will the cash be used for,"
    says Anderson. "It’s important to know if the excess cash
    will be used to pay taxes, fund expansion or buy equipment.

    "The key is to focus on whether the excess cash is short
    term, mid-range or long term. This directly affects the various
    investment options for the company. And for any term, I perform
    a risk assessment to find out the risk tolerance of the business
    owner. Any investment strategy must be in line with the risk-tolerance
    level of the business owner."

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    If the shop is going to need access to the cash within one to
    three years, it’s a short-term need. Cash needed in three to five
    years represents a mid-range need, and a long-term investment
    strategy should be employed if the shop won’t need the excess
    cash for at least five years.

    "For short-term excess cash, I recommend safe investments,"
    says Anderson. "In a case like this, you won’t have time
    to regain the funds if they’re lost in a higher-risk investment."

    Anderson recommends three basic options for short-term, excess
    cash flow: government-secured treasury bonds, bank certificates
    of deposit and high-grade commercial bonds.

    "With a mid-range strategy, you can be a little more aggressive,"
    Anderson says. "If the money isn’t needed for three to five
    years, some can be put in equities. But I recommend only blue
    chips with a high-dividend payout level. Even with a mid-range
    strategy, however, only a portion of the funds should be put in
    equities."

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    With a long-term investment strategy, Anderson recommends a multimanager,
    multistyle, multimarket asset allocation approach. This enables
    the shop owner to hedge investments over a long period of time
    by balancing a standard deviated risk level with acceptable returns.

    In situations in which body shop owners anticipate sustained excess
    cash-flow levels, Anderson also recommends that the owner consider
    executive compensation and profit-sharing plans to make sure the
    cash flow remains strong.

    "Sharing excess cash flow with employees and key executives
    is a form of investment in that you are investing in your people,"
    he says. "It increases employee morale, which typically
    leads to better operating efficiency and lower turnover. Your
    people will work harder for you if they know you’re looking out
    for them."

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    Anderson suggests incentive pay, employee bonuses and qualified
    retirement plans, such as 401(k) and pension plans, as ways to
    keep your good employees from leaving.

    Most businesses have a few key senior-level employees who are
    vital to the success of the operation and who are primarily responsible
    for the excess cash flow of a business. "Ask yourself the
    question, ‘Is there anyone in the organization whose loss would
    cripple my operation?’ If there are, put in a plan to [motivate]
    them to stay," Anderson says.

    For senior-level employees, Anderson feels nonqualified retirement
    plans are the most effective and efficient tools to keep them
    on board. In fact, nonqualified retirement plans are often referred
    to as executive compensation plans because they’re usually offered
    only to the owner or to the senior management team of a business.
    "With a nonqualified plan, you pick and choose the benefits
    and who will have something special done for them," says
    Anderson.

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    While any number of nonqualified plans can be undertaken, Anderson
    cites three different plans that are typical for small businesses:

    Executive bonus – According to Anderson, an executive-bonus
    plan is common for a new or emerging small business. The business
    pays a tax-deductible bonus – which is used to pay life-insurance
    premiums – deducts the bonus as a normal business expense and
    reports it as "other compensation" on the employee’s
    W-2 form. The employee owns the policy and reports the bonus as
    taxable income.

    This plan is advantageous for the key employee in several ways:
    It can be custom fit to meet the employee’s needs and objectives;
    it provides insurance protection for a spouse and/or family in
    the event of death; it provides potential cash value growth that
    may supplement retirement income; and taxes are paid only on the
    premium amount.

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    As the owner of the policy, the key employee holds the rights
    to all cash dividends, policy loans and withdrawals.

    Collateral assignment split dollar – Anderson says that
    split-dollar plans are more common with maturing small businesses.
    Under this plan, the company pays all or part of the premium for
    a key employee’s life-insurance policy. A portion of the death
    benefit and policy cash values (equal to the premium paid by the
    employer) is assigned to the business, and the employee pays income
    tax on the cost of the policy’s current economic benefit, which
    is usually minimal.

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    At a future date, usually triggered by the retirement of the employee,
    he or she uses cash values to repay the premiums the company paid.
    The split-dollar agreement is terminated, and the policy and its
    benefits belong solely to the employee.

    Voluntary deferred compensation – According to Anderson,
    deferred compensation delays payment of a portion of a highly
    paid employee’s income (and taxes) until retirement when his/her
    income level presumably will be lower. It also provides funds
    in case of early retirement or disability.

    Go With the Flow

    Creating and maintaining excess cash flow are two of the most
    vital functions of any body shop. As easy as it is to get caught
    up in the day-to-day operations of running your business, you
    need to make it a priority to create a steady flow of excess cash
    and to devote the necessary time and thought to managing it.

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    J. Tol Broome Jr. is a contributing editor to BodyShop Business.

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