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Figuring Out Financials

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This Month’s Ailing Shops …

Shop No. 1

Annual Sales Volume: $449,000

Units Completed: 357

Average Repair: $1,257.70

Organization: Sole Proprietorship

Employees: 7

Owner: Steve

Accounting Duties: Steve’s wife, Cheryl

Shop No. 2:

Annual Sales Volume: $2.4 million

Units Completed: 1,369

Average Repair: $1,753.10

Organization: Sub Chapter S Corporation

Employees: 17

Owner: Mark

Accounting Duties: Mary

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Problem overview:

The owners don’t understand their financials.
They receive accounting information but lack the training
to decipher what it means and to implement the necessary changes
to make their businesses more profitable.

Once these two shop owners began understanding their accounting information, the shop owner who thought he had a cash flow problem realized he didn’t. And the shop owner who didn’t think he had a cash flow problem realized he was going to. by Tony Passwater

Last time in Shop Doc (Feb. 2002), we examined shop owners Dave and Linda, who struggled to work together as husband and wife. This is a very common relationship challenge for any small business – and our industry is no different. From our involvement, we were able to identify some basic changes that helped to improve both their working and personal relationship.

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This month, we’re taking a look at two shops’ financial systems. Even though these shops represent very different sales volumes, their problems are similar.

The Problem: What the Heck Do These Figures Mean?
Mark’s business has been growing in leaps and bounds for the last four years. He expanded his operation into a new building three years ago. Ever since his first year in the new facility – when he did just a little more than $1 million – his sales volume has continued to rise. Mark’s been riding the wave in a booming market.

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Mark was originally a technician in a small area shop, which has since closed. His background is on the technical side, even though he’s been taking AMI accredited courses during the last few years to improve his management skills.

His greatest need from us was to understand his financials – he was unsure of the information his accounting employee, Mary, gave to him, along with the information provided to him at year-end by his accountant. It seemed to him that he did much more work than what the year-end profit showed.

My other client, Steve, has been in business five years in a small town that’s within 40 miles of a major market city. His wife, Cheryl, works what Steve terms part time (but it’s really full time) to do the accounting and to keep his books in order.

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Steve’s business was struggling with cash flow. He was also considering expanding into a new building in the "newer" part of town, where a new housing area is located and many businesses are moving. As to understanding the financials, Steve, too, was uncomfortable with the information and lacked the training to know what to do with the information.

Both shops use QuickBooks as their accounting system, although Cheryl just implemented the program this year. In both instances, our first challenge was to provide training to each about basic accounting practices that are important to any business, including a collision business.

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Shop No. 1
Even though Steve’s wife, Cheryl, did the day-to-day entries in QuickBooks, they left the closing of the books to their accountant (PA). This resulted in a very basic accounting statement that didn’t break down the sales or costs into categories other than parts/materials, labor and other.

With Steve and Cheryl, we first reviewed their financial statements and explained to them what each item meant. This included running detailed reports from QuickBooks to see what transactions were being put into what accounts and to show why proper and consistent procedures are extremely important if you wish to use the information.

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One of the first challenges we faced was timeliness of information. Currently, they were receiving quarterly financial statements 45 to 60 days after the quarter close. I explained to Steve and Cheryl that this type of financial information is already after-the-fact and that the later it’s received, the less value it has.

Steve’s first reaction was to go to a yearly statement then – since the information was already late. I finally convinced him that the solution was to go the other direction: He needed statements monthly, not just quarterly.

This provided another couple of immediate challenges. First, the accountant wasn’t solely to blame for the late statements. Cheryl wasn’t providing the information until at least 30 days after the end of each quarter. We resolved this by getting a commitment from Cheryl to close the books within five business days of the end of the month. Going to a monthly statement actually made this easier to accomplish since the volume is less. It did, however, require that Steve close jobs and finalize supplements on a much more timely basis.

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The second challenge was to get Cheryl and Steve to take the time each month to review the information and to check it to the target they set for the business. And if there’s a variance, they need to determine why it happened, how it can be corrected or if next month’s targets need to be revised. Setting a target (an accountability) for small-business owners is always a challenge, but it’s worth it.

We reviewed their complete last year’s accounting records and set up targets (budget) for all their expenses, including their profit target. The spreadsheet we used is available on www.TheBOSs-Online.com using the keyword "Target Planning."

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We also needed to implement some important procedures for entering information into QuickBooks and to begin with a proper chart of accounts for the collision industry. QuickBooks is a very flexible program, but with flexibility comes some user responsibility.

QuickBooks allows you to set up vendors, customers and other lists in many ways. There is, however, only one right way to do it in the collision industry if you want to get meaningful data that can be compared to a standard (benchmark). We provided a step-by-step procedure and trained Cheryl how to:

  1. Enter in new customers and their respective repair orders, which QuickBooks calls jobs.
  2. Handle COD payments and credit card transactions (personal and business).
  3. Set up vendors so when the statement comes in, it’s easy to reconcile.

Next, we customized a company account we’d designed for the collision industry a few years ago. It includes a chart of accounts that’s specifically designed for industry needs and includes payroll setups, final invoices, custom fields to include insurer information and pre-set reports. Most of these procedures and a standard Collision Industry Company Account are available at www.TheBOSs-Online.com using the keyword "QuickBooks."

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After we transferred data into the new company account, we were able to produce much more detailed, informative reports so Steve and Cheryl could make better business decisions. We also provided a set group of reports to run each month that included:

  • Balance sheet;
  • Profit and loss (both cash and accrual basis);
  • Open invoices (by customer and insurer);
  • Vendor balances; and
  • Payroll, accrual taxes due, payroll summaries.

Now the profit and loss shows sales and costs of parts, mechanical labor, structural labor, metal labor, paint labor, detail labor, materials, sublet and towing.

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Steve and Cheryl have become very aware of their costs and financials since our visit – and their business is improving from it.

As for Steve’s money problem, it was simply a result of not getting the files closed and supplements approved in a timely manner that caused a cash flow problem when he went to pay his vendor bills at the end of each month. Once we implemented the closing of all files immediately upon the vehicle leaving (targeting within six months to get them done prior to the vehicle leaving), his cash flow problem became less of a problem. We also assisted in setting up a credit line with his bank to handle these situations.

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Because we’ve established relationships with qualified CPAs who work very well with collision businesses, we also referred Steve and Cheryl to someone in their area. They found that this CPA could receive their QuickBooks data file by e-mail and was able to finalize their books much more efficiently (and less costly) than their past accountant. They’re now talking to someone who not only understands our industry, but who charges them less than they paid in the past!

The last time I touched base with Steve and Cheryl, they were incorporating as a Sub S corporation and were looking forward to some of the financial benefits it would bring the business. (Since we’re not tax experts, we recommend that you explore these choices for your business, as well, by getting advice from a qualified CPA who’s worked with our industry. The main advantage of a corporation or a Limited Liability Company is, of course, the limiting of your liability in case something disastrous happens. Every state has its own requirements, but they’re remarkably close to one another. Thre are also other tax advantages:

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– A Sub Chapter "S" Corporation’s main advantage is that profits pass directly through to the stockholders without being taxed federally first. In a regular corporation, the corporation pays taxes on profits and then you, as a stockholder, pay taxes again on dividends received and on your salary. There are many methods to reduce some of your tax liability by working in a Sub “S” structure. But keep in mind that other factors may make a regular corporation more attractive to you – especially in the areas of medical insurance, meals and educational reimbursement.)

Shop No. 2
Even though Mark’s business is much larger than Steve’s, he also suffered from the same lack of understanding of QuickBooks and a lack of proper procedures.

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I provided the same training and education to Mark and Mary as I did to Steve and Cheryl. (Too bad they were on different sides of the country!) I did, however, have a harder time making all the changes at Mark’s shop. Mark is using a collision-management system that exported into QuickBooks, and the export file isn’t very flexibile.

In many cases, management system developers don’t really understand the accounting procedures QuickBooks uses or the special features QuickBooks has to offer, so the imports often force the user to make adjustments when they’re received.

Case in point: Mary had to perform an additional procedure after each import – she needed to make sure that customer and job information came into QuickBooks accurately and that vendor charges were moved into the their separate "charge" accounts. Otherwise, at the end of the month when looking at bills due, there would be a list of hundreds of invoices rather than the total payment due. At the volume of business they were doing, this certainly made looking at account balances easier. Mark now understood what the financials meant and what targets to provide to his estimators and managers.

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I also identified another common problem area: The business’ profits were being affected by the expenses of the owner’s "perks." I’ve said it before and I’ll say it again: You can take the profits out of a business with legitimate and not-so-legitimate expenses before it reaches the bottom line. I’ve seen very expensive company vehicles, vacations and even the kids’ college tuition placed on the business. These may or may not be considered legitimate in your mind or mine, but I had to remind Mark that the well has only so much water – and that if you drink it all now, there’s nothing left for later … unless it rains. Lucky for Mark, it’d been raining a lot. His shop’s sales have been increasing dramatically each year, but so has his spending.

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We sat down and identified a complete list of expenses that could’ve been reclassified and then recalculated his profits. It showed a much different picture. We also suggested that Mark do some financial planning with an expert in this area to better prepare for his future.

What really put all this in perspective for Mark and helped him to understand what we were talking about was his former boss’ shop, which had since closed down. He’d told me that his former boss had been into local and regional race cars and had a large boat docked on the lake. Wanting such extravagances were one of the reasons Mark decided to open his own shop. All I had to do was explain to Mark that if he continued buying "toys" at this pace, he could join his ex-boss, who was working as a technician in a shop on the other side of town.

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I last visited with Mark about six months ago and was impressed that the procedures we implemented were still in place. He was monitoring his job-by-job profitability from his management system, and he was also looking at his business’ financial strength each month. He also had an understanding of his targets and kept his future in mind.

Avoiding a Financials Fiasco

Both of these cases ended happily, but sometimes it isn’t so. We’ve found that unhappy endings are usually caused by an independent shop owner’s delay and hesitation in seeking assistance. It’s also often due to an owner’s unwillingness to change or to ensure that systems are implemented consistently.

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The latter is difficult for a coach or consultant because we can see what needs to be done and are sure it’ll make huge differences – but the leadership isn’t there to make it happen. In these cases, it seems as if the client has already accepted defeat and is just there waiting for the final bell to go off to end it all.

There’s nothing wrong with not understanding your financials. It’s not a skill most people are born with, and it requires training and time to make it a habit. There is something wrong, however, if you aren’t willing to learn what you need to learn and to implement the necessary changes. If that’s the case, "Ding, ding, ding!" That’s the final bell. It’s ringing for you.

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Contributing Editor Tony Passwater is president of AEII, a consulting, training and system-development company. He’s been in the industry for more than 27 years; has been a collision repair facility owner, vocational educator and I-CAR international Instructor; and has taught seminars across North America, Korea and China. He can be contacted at (317) 290-0611, ext. 101, or at [email protected] his Web site at www.aeii.net for more information.

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