As the collision repair industry heads into what some people are calling its “big business” era, many shop owners are considering expanding with multiple locations or becoming part of a franchise to better compete in the years to come.
But don’t get ahead of yourself. Before those decisions can be made, a shop owner needs be sure his finances are in order.
For many shop owners, the process of financial planning has always been limited to meeting next week’s payroll. And with so many financial fires to put out in a given week, it’s hard to find the time to do any short- or long-range financial planning.
But failing to plan financially might mean that you’re unknowingly planning to fail.
Business budgeting is one of the most powerful financial tools available to any business owner. Put simply, maintaining good short- and long-range financial plans enables you to better control your cash flow instead of having it control you.
The most effective financial budget includes both a short-range, month-to-month plan for at least a calendar year, as well as a quarter-to-quarter, long-range budget for at least three years.
If you’re one of the many shop owners who never quite gets around to preparing a financial plan, you certainly aren’t alone. You may have tried it in the past and become discouraged by the many financial variables that go into a good budget. Or maybe you weren’t comfortable trying to predict the future. Or you might have done a budget only to have it blow up in the second month because of some unexpected occurrence like a major equipment repair.
It’s true that no one can predict the future, and no financial plan ever turns out right on the money. What a good budget does, though, is allow you to plan ahead for capital expenditures, revenue growth, increased supplier prices, economic changes, etc. And, even if these are things you never planned for before, the industry is changing so much that you need to be a better business person if you want to continue to be a successful shop owner.
The key reason to budget is financial control, which enables you, as an owner, to better accomplish important big-picture and day-to-day financial objectives. Budgeting helps you to become a better macromanager by enabling you to:
- Manage proactively rather than reactively;
- Borrow money easier. Not only can you plan ahead better for financing needs, but sharing your budget with your banker will help in the loan-approval process;
- Provide financial-planning information for investors;
- Make your operation more profitable and more efficient; and
- Provide yourself with a great decision-making tool for key financial considerations.
Budgeting helps you to become a better micromanager by enabling you to:
- Avoid investing too much money in equipment, real estate and other fixed assets;
- Maintain working-capital needs more efficiently;
- Set sales goals. You need to be growth oriented, not just an “order taker”;
- Improve gross profit margin by pricing your services more effectively or by reducing supplier prices, direct labor, etc. that affect cost of goods sold;
- Operate more efficiently by keeping SG&A expenses down more effectively;
- Perform tax planning;
- Plan ahead for employee benefits; and
- Perform sensitivity analysis with the variables involved.
When Do You Budget?
As mentioned, budgeting is most effective when both short- and long-range plans are maintained. The short-range budget should cover a fiscal year for your body shop, coinciding with the year end you use for financial statement reporting. It should be prepared during the two months preceding the fiscal year end to allow ample time for sufficient information gathering.
The long-range plan should cover a period of at least three years (some go up to five years) on a quarterly basis or an annual basis. The long-term budget should be updated when the short-range plan is prepared.
While some owners prefer to leave the one-year budget unchanged for the year for which it provides projections, many owners adjust the budget during the year based on certain financial occurrences, such as an unplanned spraybooth purchase or a larger-than-expected upward sales trend. Using the budget as an ongoing planning tool during a given year certainly is recommended. However, here’s a word to the wise: Financial planning is vital, but it’s important to avoid getting so caught up in the budget process that you forget to keep doing business.
What Do You Budget?
Many financial budgets provide a plan only for the income statement; however, it’s important to budget both the income statement and balance sheet. This enables you to consider potential cash flow needs for your entire operation, not just as they pertain to income and expense items. For instance, if you’re adding a new spraybooth, you’ll need to consider the impact of not only the increased debt service, but also the purchase of new spraybooth supplies on cash flow.
Budgeting only the income statement also doesn’t allow a full analysis of potential capital expenditures on your financial picture. For instance, if you own your own shop and are planning to purchase additional real estate for your operation, you need to budget the effect the added debt will have on cash flow. Likewise, if you lease and are expanding or planning significant leasehold improvements, you need to consider the effects of higher rent payments.
Categories you need to include in a financial plan:
- Cost of goods sold;
- Gross profit;
- Operating expenses;
- Operating profit;
- Other income;
- Other expenses;
- Net income before taxes;
- Income taxes;
- Net income after taxes.
- Accounts receivable;
- Other current assets;
- Total current assets;
- Attractions, real estate and other fixed assets;
- Other assets;
- Total assets;
- Notes payable — short term;
- Current maturities of long-term debt;
- Accounts payable;
- Accrued expenses;
- Taxes payable;
- Stockholder loans;
- Other current liabilities;
- Total current liabilities;
- Long-term debt;
- Deferred taxes;
- Other long-term liabilities;
- Total liabilities;
- Stockholder’s equity;
- Total liabilities and stockholder’s equity.
- Net income after taxes;
- Depreciation & amortization;
- Decrease in accounts receivable;
- Decrease in inventory;
- Increase in accounts payable;
- Loan proceeds;
- Total cash available;
- Owner’s draw;
- Current maturities of long-term debt;
- Capital expenditures;
- Increase in accounts receivable;
- Increase in inventory;
- Decrease in accounts payable;
- Total disbursements;
- Cash flow for period (month, quarter);
- Cumulative cash flow.
Yes, this seems like a lot of information to try to forecast, but it’s not as cumbersome as it looks. You should already have the information that provides the impetus to prepare your financial plan at your disposal, so all you need is your accountant-prepared year-end financial statement to get started.
How Do You Budget?
With the accountant-prepared financial statement in hand, you’ve already won half the battle in preparing a financial plan. What you’ll also need is historical monthly financial statements. You may prepare your own on internal financial-reporting software, or you might have your CPA put together a monthly financial statement. It really doesn’t matter for budgeting purposes, just as long as you have a monthly statement with which to work.
The next thing you need is a PC with spreadsheet capability. If you’re reasonably proficient on a PC or have someone on your staff who is, you can easily build your own budget spreadsheets on software such as Lotus or Microsoft Excel. Another option is to purchase a good budget software package such as Quicken or WinFast.
The accompanying charts provide sample budget spreadsheets for the income statement, balance sheet and cash flow. You should find a similar format in any budgeting software, or you might want to use this exhibit as a starting point to build your own financial plan.
The first step is to set up a plan for the upcoming year on a month-to-month basis. Starting with the first month, establish specific budgeted dollar levels for each category of the budget. It’s recommended that you break down each category into subcategories. For instance, for sales, budget separately for spraybooth revenues, alignment jobs, insurance jobs, etc. Budget the same breakdown for cost of goods sold. For operating expenses, consider line items such as advertising, auto, depreciation, insurance, etc.
On the balance sheet, break down inventory by type. Consider each specific item in fixed assets broken out for real estate, equipment, investments, etc. On the liability side, break down each bank loan separately. Do the same for the components of stockholder’s equity — common stock, preferred stock, paid-in-capital, treasury stock and retained earnings.
Do this for each month for the first 12 months, and then prepare the quarter-to-quarter budgets for years two and three. For the first year’s budget, you’ll want to consider seasonal factors in preparing the budget. For most body shops, cold weather months produce more revenue, which results in wide-ranging changes in cash flow needs. For this reason, you’ll want to consider seasonal factors in the budget rather than taking your annual, projected year-one sales level and dividing by 12.
As for the process, you’ll need to prepare the income-statement budgets first, then balance sheet, then cash flow. You’ll need to know the net income figure before you can prepare a pro forma balance sheet because the profit number must be plugged into retained earnings. For the cash flow projection, you’ll need both income statement and balance sheet numbers.
In preparing the pro formas, you’ll want to use your historical performance as your starting point for assumptions. Look at the numbers for the previous three years of your operation to help with both the short- and long-range financial plans. If your sales have grown an average of 10 percent over the past three years, then this might be a good indicator of how to project revenue growth for the next year. You’ll also need to consider many other factors, such as:
- New sections of your shop;
- Expense-cutting plans;
- Purchases/renovations of assets;
- Acquisition plans of other body shops;
- Increases in prices;
- Opening or closing of shops, etc;
- Competitive factors, particularly if a new body shop is opening or a competitor is closing a nearby shop;
- Changes in supplier prices;
- Interest-rate environment for bank debt;
- Changes in tax rates;
- Changes in occupancy expense;
- Changes in insurance premiums; and
- Any other major financial changes planned for your body shop.
It’s advisable to involve your CPA in the financial-planning process, and his role will depend on the internal resources available to you and your background in finance. You may want to hire your CPA to prepare the financial plan for you, or you may simply involve him in an advisory role. Regardless of the level of involvement, your CPA’s input will prove invaluable in providing an independent review of your short- and long-term financial plan.
One other major benefit of maintaining a financial plan is the ability to perform sensitivity analysis. Once you have a plan in place, you can make adjustments to it to consider the potential effects of certain variables on your operation. All you have to do is plug in the change and see how it affects your body shop’s financial performance.
Here’s how it works: Let’s say you’ve budgeted a 10 percent sales growth level for the coming year. You can easily adjust the sales growth number to 5 percent or 15 percent in the budget to see how it affects the shop’s performance, and you can undertake sensitivity analysis for any other financial variable as well. The most common items for which sensitivity analysis is done are:
- Cost of goods sold and gross profit;
- Operating expenses;
- Interest rates;
- Accounts-receivable days on hand;
- Inventory days on hand;
- Accounts-payable days on hand;
- Major fixed asset purchases or reductions; and
- Acquisitions or closings.
Ten years ago, you probably never considered taking the time and exerting the effort to plan such a detailed financial future for yourself. But 10 years ago, you didn’t have the cut-throat competition that you do today — back then, the industry had plenty of room for everyone.
Those days are gone.
Consolidators are buying up successful shops, and not-so-successful shops are being put — or putting themselves — out of business. Nothing is like it was 10 years ago. In fact, it’s not inconceivable that shop owners may someday soon be outnumbered by business people who just happen to own shops.
And business people know how to manage their money. Do you? If you want to be around for the next 10 years, you need to learn.
Writer J. Tol Broome Jr. is a contributing editor to BodyShop Business.