Has this ever happened to you: Business is booming and you’re so busy fixing cars that your company now has an accounts-receivable balance that could pay the national debt (or at least all your administration salaries for a year and beyond) and a bank balance that looks more like a personal account rather than a state-of-the-art collision repair facility’s business account?

Unfortunately, this is a common situation that occurs with service-business owners all over the country. The sad fact is, it really isn’t necessary — but it is detrimental to the business’ health, along with the owner’s.

Keep in mind that with the high balances of accounts receivable come non-collectibles and 120-day-and-beyond balances. Let’s face it, most collision repair businesses have accounts receivable to deal with. After all, we’re not a McDonald’s where the product is produced on demand and payment is made in cash immediately at the time of sale. In fact, if you watch carefully, the McDonald’s system requires payment before the product is supplied. Their staff is trained to provide the drinks, ask and receive payments, and then supply the product. Wouldn’t it be great if we used this system of payment for our services? Even in the construction business, it’s common to pay a third of the estimate to begin, a third in the middle of the work and the remaining balance at the immediate completion.

Why not our industry?

That’s exactly what this article will teach you: how to establish systems that will get you paid promptly for the services you provide, along with how prompt payment affects your bottom line.

Plummeting Profits
Believe me, getting paid promptly has a dramatic effect on your business’ profitability and health. This type of effect doesn’t show up in the profit-and-loss statement (unless you know where to look), nor does it show up in the job-costing reports. This type of loss is reflected in the balance sheet and where it hurts most: the heart of a service business, the daily cash flow.

Profitability can be measured many ways — from an overall perspective with the balance sheet and profit-and-loss statement to the micro-view of job costing. But neither of these methods do a good job of analyzing the cash flow of the business and what it costs you not to manage your accounts receivable.

The following examples should provide you with a better understanding of what managing your accounts receivable means to profitability:

Let’s use an average repair that’s originally estimated at $1,500 from an insurance drive-in claims center. By the time the vehicle is completed, the supplements have reached $300, making the final bill $1,800 (I know supplements are often more in these scenarios, but let’s give them the benefit of the doubt). When the customer comes in to pick up his vehicle, you collect his deductible and the insurance check for the balance of the original $1,500 and bill the insurance company $300.

Assuming you receive the $300 for the supplement, here’s what the profit for this repair would look like:

Sales	Gross Profit %	Gross Profit $
Parts:
$910	28%	$254.80
Metal Labor:
$406	60%	$243.60
Paint Labor:
$286	60%	$171.60
Materials:
$150	25%	$37.50
Sublet:
$48	25%	$12.00
Sales Income:
$1,800	40%	$719.50

The above shows that you’ve achieved a 40 percent gross-profit margin on the job. This may or may not be the target you’re attempting to reach, but it’s a good example to use when demonstrating the loss of profitability that occurs when proper communication, authorization and collection aren’t achieved — which is what I’m about to demonstrate:

• Example 1: Due to a misunderstanding or improper authorization, the supplement received is reduced. The following illustrates how it will affect profitability:

Amount Reduced	New Gross Profit %	New Gross Profit $
– $100	34.40%	$619.50
– $200	28.90%	$519.50
– $300	23.30%	$419.50

This example shows that if the supplement is carried as an accounts receivable without re-calculating the actual sales income, profitability suffers dramatically if you don’t collect.

• Example 2: Let’s use the same scenario as Example 1, except that you re-adjust the sales income to match what you actually received for the final payment.

Amount Reduced	New Gross Profit %	New Gross Profit $
– $100	36.40%	$619.50
(sale = $1,700)
– $200	32.50	$519.50
(sale = $1,600)
– $300	28%	$419.50
(sale = $1,500)

This example — like Example 1 — shows that collecting is very important to overall profitability. A scenario like this would also affect specific income accounts since the reduction of the sale will require one or many individual income accounts to be reduced to balance. In most cases, however, technicians have already been paid for the labor, and reduction is done in the parts and/or materials accounts. This will then provide a skewed view of each profit center.

Besides the fact that profitability is affected in these two examples, there’s another important factor to consider here: If you don’t collect in full what’s owed to you, you can’t use it. This means you can’t invest the money (such as in sweep accounts) or pay statements timely to take advantage of accounting discounts. It also may mean you’ll have to pay interest on credit lines used to maintain operations (cash flow). Granted, this one example shouldn’t cause all this to happen, but we aren’t talking about just one vehicle are we?

Turn Your Money
With the emphasis on turn rate or cycle time to reduce costs, it’s equally important to consider the turn rate of your money. Why? Because to remain profitable, it’s critical to "turn your money" as quickly as possible. This requires a system to ensure it will happen, along with training and evaluation.

If you’re faced with large accounts-receivable balances and have problems collecting supplements, the following systems are a must:

1. Establish a journal for all insurance companies and other billed accounts.

2. Establish payment policies in writing.

3. Establish policies for supplements.

4. Close files on time.

5. Invoice immediately and follow up.

6. Establish accountability internally.

Let’s take a look at each of these systems in more detail.

Establish a Journal for Accounts
Start with a three-ring binder divided with every insurance company and invoiced customer you do business with. Each section should include billing information, special billing requirements (account numbers, "final bill" written on upload, photos required, uploading procedures, etc.), supplement policies, re-inspection policies, organizational chart (who to go to and when), charges and wording allowed and not allowed, rates, concessions, notes from specific prior claims that caused problems, and even individual personality traits, interests and associations.

This journal becomes a working document that provides a system for how each account does business. It also assists in establishing uniform procedures for your estimators and customer-care personnel. Without it, how would anyone remember all the rules?

A checklist that outlines the proper supplement and billing procedures for each company also should be developed. A copy of this checklist should be placed in the vehicle file for the appropriate personnel in your organization to use to document the process. In most cases, when auditing files, I’ve found the reason payments are delayed or not collectible is because proper authorizations weren’t obtained and no one wants the "dirty job" of collecting supplements (after the fact).

Establish Payment Policies in Writing
How often in other businesses do customers not know what’s expected of them in regard to payment for a product or service? Not nearly as often as in our business. Why, then, do we assume — even though getting a vehicle repaired isn’t a common occurrence to most people (unless they have teenagers) — that our customers understand how payments are made?

Have your customers ever come to pick up their vehicles and not known they had to pay their deductibles or betterments to you? Why? Because you didn’t establish a mutual understanding with the customers as to their responsibilities. We shouldn’t assume (you know what that does) customers know the rules.

The following should help with this piece of the payment challenge:

1. Use a payment-policy checklist with every customer upon drop-off or scheduling of the vehicle.

2. Review the policy over the telephone when the delivery is scheduled.

3. Enforce the policy for everyone!

This payment policy can include a number of key points to establish expectations and ensure a smooth delivery. It’s too uncomfortable for everyone when these expectations are brought up after the customers show up, their ride has left and they haven’t brought the money.

This policy can also address third-party financial endorsements that may be required on insurance checks. What happens if the customer is behind on his payments and the financial institution won’t sign off? And after that’s handled, what happens if the supplement check comes in and, again, he’s behind?

The payment-policy forms should also include repair authorizations, a power of attorney and authorization by the customer to have the insurer pay the repair facility directly. This will expedite payments and shorten the time to make the payments available for deposit. (Don’t forget to list these in the journal for each insurer.)

Establish Policies for Supplements
Every collision business can identify those companies they have little or no challenges with and those that consistently cause a higher level of stress and delay. This must be documented!

With that said, I also need to say that, from what I’ve seen, collision repairers themselves — not insurers — cause the greatest delay in collection of supplements. We can point fingers, but as the old saying goes, "If you point your finger, there are always three fingers pointing back at you." We’re all very busy, so making sure the communication is "absolute" is challenging.

Here are some hints to lessen the challenge:

1. Always have the needed supplement figured before requesting it.

2. Always check the journal to see what policies may effect the wording, rates and charges.

3. Don’t act as if you’re begging.

4. Document, document, document!

First, never call for a supplement without having everything ready for approval. If re-inspection is required, everything must be written and ready when the re-inspection occurs. The re-inspector should sign your supplement before leaving, authorizing the work. Don’t get into the game of, "I’ll fax the supplement to you when I get back to the office" (unless you’ve written in your journal that they’re a company that works well with your supplements, and you’re confident the supplement won’t be delayed or changed).

You also need to set a target average for everyone in your organization to have only one supplement per repair order. This will improve your relationships with vendors, technicians and insurers significantly. This doesn’t mean to just wait until all the stuff is final; it means to actually average only one supplement internally per vehicle as well. (Note: This requires training and a production system. I’ve worked with many shops to implement a successful system that reduces this challenge and improves overall production; this, however, isn’t within the scope of this article.)

You also need to make sure what’s being requested is allowed by the specific insurer — so know the rules! And when a supplement is needed, don’t get into a begging mode; explain and support with pictures, invoices and manufacturer documentation.

Lastly, document conversations, any refusals of services and agreements reached by telephone. If necessary, have a summary form faxed to the insurer for signed authorization immediately after the conversation (the ones in the journal for which you have challenges documented). Do this immediately, and don’t release the vehicle until it’s received.

Documentation is something that requires a commitment on everyone’s part to do consistently time and time again. Using scrap pieces of paper and documenting only certain repairs don’t cut it. If the supplement is done on site, then use the same summary form to document the agreements — and have the adjuster sign it before he leaves.

If the supplement authorization on file hasn’t been received when the vehicle is completed, let the customer know the vehicle is done but you’re waiting for payment authorization from the insurer before it can be released. This doesn’t have to be done in a malicious way to be effective. And don’t instruct the customer to contact the insurer to complain. The customer will naturally inquire and improve processing without your input. It’s also effective for you to contact the insurer and let them know the vehicle is complete and you’re waiting on the supplement authorization. This could mean additional rental days at their cost, so it would be in their best interest to get the file closed.

For direct-repair relationships, this process has changed. But it doesn’t change the fact that the journal is needed to document the proper wording and operations approved and not approved. If these things aren’t considered, the post inspection or auditing may adjust the authorized amount after the fact — and this would be your own fault for not playing by the rules you agreed to.

Close Files on Time
The No. 1 collection slowdown I see in our industry is that files aren’t always closed before customers pick up their vehicles. It seems we believe our job is to fix vehicles and get them out the door — but that’s only part of it. In fact, that part is production’s responsibility. Handling files isn’t. And remember, this area can dramatically affect profitability.

Files must be closed before customers pick up their vehicles — no exceptions. Exceptions are the causes of these added delays. No matter how messed up the file is, it must be closed to expect payment. This forces everyone to understand the importance of documentation and following the system.

When customers pick up their vehicles, they must sign for the repairs to make them primarily responsible for any additional payments (after all, they do own the vehicles and they did benefit from the services). This may also assist you if payment delays are encountered later because, now, they have a vested interest in your claim.

Invoice Immediately
Send invoices immediately upon closing the files — not three days later, not a week later, not at the end of the month. Immediately. And make sure to supply all documentation required as per the journal. After the invoice is sent, run aging reports on the accounts to monitor their payments for follow up. Include the company’s average cycle time and specific claims-representatives cycle times in the journal for benchmarking.

Remember, if you don’t invoice properly, you won’t get paid!

Establish Accountability
This isn’t just an issue for the person in charge of accounts receivable or for the bookkeeper. Everyone involved in the file is responsible for doing their jobs. Estimators, parts personnel and customer-care personnel all have an effect on accounts receivable. For this reason, establishing accurate job descriptions, responsibilities, policies and systems is the beginning of unwinding the tangled mess of repair files.

Incentive systems must address this area, too, and should only be based on closed files. And be sure that collection can affect their next incentive period retroactively. The key here is that it isn’t over until the payments are received and documented.

Managing to Get Paid
The greatest challenge with getting paid today is that, because of direct-repair programs, administrative requirements have increased — but we haven’t developed the systems, accountabilities and training to manage them. Management systems and accounting packages can help, but it takes additional systems, as outlined in this article, to really make it happen.

Business is business. And your business isn’t just about repairing vehicles anymore. Your techs may perform top-quality repairs, but if you don’t have a system in place for collecting accounts receivable, your shop isn’t going to survive. If you want to continue running a successful business, not only do you need to understand the importance of establishing systems for collecting payments, you must actually establish them.

Contributing editor Tony Passwater is a long-time industry educator and consultant who’s been a collision repair facility owner, vocational educator and I-CAR international instructor; taught seminars across the United States, Korea and China; and is currently an industry consultant. He can be contacted at (317) 290-0611 or [email protected].