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Keep the Cash Flowing

Profitability and cash flow aren’t the same thing: You may have a backlog of profitable jobs scheduled, but no money to pay the bills. How do you overcome this? Learn to manage three things: owner’s extras, accounts receivable and accounts payable.


How often have you been busier than ever before – profitable jobs are coming in left and right, and your staff is working 12-hour days – but the banker keeps calling to say funds are too low and bills are overdue?

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This, most likely, is due to a cash flow problem (and hopefully not embezzlement). But before you start packing up your files and selling off equipment, realize that most businesses experience this major stumbling block in their life cycle. In fact, many experience it numerous times.

But why?

Profitability and having “cash on hand” aren’t the same thing. Our industry’s business model isn’t as simple as some may think. For one thing, repair shops have accounts receivable to deal with. Let’s face it, we’re not a McDonald’s where the product is produced on demand and cash payment is made 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 payment, and then supply the product. Wouldn’t it be great if our businesses could use this system for payment for our services?


If you’re not in the same situation as our example shop – making a profit on each job – the effects of “lack of cash” will be even more dramatic. For this article, let’s assume you’re reaching your target profit levels. If not, you need to first get help with this important concept because cash flow management techniques will only delay the inevitable – running out of cash and going out of business.

Determining whether you’re maintaining proper profit levels on each job may require job costing. After a system is in place long enough and an organization with good documented systems has grown, this can be accomplished on a larger scale from month-end accounting reporting.


With that in mind, to properly manage your cash and have proper cash flow requires a clear understanding of what affects cash flow. The factors are pretty simple but often underestimated:

1. Owner’s Extras.

2. Accounts Receivable.

3. Accounts Payable.

Owner’s Extras
These extras may very well be the main reason your business is having cash flow problems. The margins (profits) on today’s jobs have a finite limit. As a business consultant, however, I often see a shop owner’s cash draws, toys, benefits and other related expenses far surpass the current business volume norms. You can’t blame someone for wanting to live well, but you can blame someone for doing it poorly in a business sense. Unfortunately, this area is a sensitive topic if it’s identified as a profitability and cash flow burden on the company.


This article can’t possibly determine whether this is your problem or begin to provide solutions, but you must realistically calculate your costs to the business in both profit and cash flow. And if this factor is to blame, you need to correct it.

Accounts Receivable
Today, having 7 to 10 percent of your monthly sales listed as current accounts receivable balances isn’t uncommon. I’ve seen worse (much worse), and the business suffers as a result.

With the administrative work transferred to the collision industry from insurers by way of direct-repair programs (DRPs), there’s often a loss of focus on closing the files in an efficient manner. Even without DRPs, the lack of concern we’ve seen passed down by owners to file handlers is amazing. Believe me when I say that this very important concept of collecting your money is key to your business’ future and that your whole staff must be aware and accountable. It doesn’t take a lot of jobs that haven’t be collected or haven’t reached proper supplement agreements to turn your cash flow faucet to a slow drip and affect your bottom line.


Though the effects on profitability are apparent, I’ve left out one important factor: If you don’t collect it, you can’t use it!

For a more detailed explanation of the effects uncollected money has on your profit levels, see the box titled, “The Effects of Unclaimed Cash,” on page 76.

To many, a key advantage of DRPs is the quick turnaround for payment. This is being improved even more with the electronic transfer of funds directly into your account within a short period of time after a file is closed and transferred to the insurer.


Closing a file may seem like “no big deal,” but that’s probably because you don’t understand the value of cash and what advantages this may offer your business. Because we no longer need the file completely ready when the customer picks up his vehicle, it’s common to simply put off closing the file. I’m not saying we’re procrastinating (well … yes, I am), but there’s so much more administration to do than in the past. We simply put that file in a pile on our desk that’s mentally labeled “Attend to Later.”

Another problem: I often see that only one person in a facility is allowed to close files. So the pile just grows and grows. It’s an ugly thing – the stress (or cash level) gets to the point where the person puts in a complete weekend (or week) just to close files. Does he do a better job than anyone else? Absolutely not – unless no one else is given the tools to perform the closing. Even if you, the owner or manager, want to exercise the final control of closing the file by performing a final audit, the rest can be done by just about anyone who receives some training.


Common problems associated with open files can usually be attributed to poor documentation within the file or to the processes of identifying supplemental items. This is why developing an insurance journal to document each insurer’s requirements and negotiated supplemental items is critical. For more details, see, “I Want My Money,” April 1999 BSB. Or go to to “Search Past Issues.”

The scariest part of this is that too often, these open files aren’t considered accounts receivable until they’re closed. And I’ve seen weeks (and even months) go by from the time the customer picked up his vehicle until the file was closed and included in the accounts receivable reporting. Big mistake.


The problem is compounded if the customer paid his deductible when he picked up his vehicle, but the check was attached to the file and hasn’t been deposited because accounting didn’t get the file until it was closed.

I realize some of you are saying, “That never happens,” while others are moving chairs to make room to hide under the table. The key here – whether the files are DRP or non-DRP – is to finalize and close them before the customer arrives. It must become a higher priority than it currently is.

Accounts Payable
Anyone who’s been in this business longer than five seconds knows you don’t get all the parts, materials, labor and supplies for free. They need to be paid for. The important consideration is how and when.


As a small business grows, so must the owner’s understanding of basic business principles. These basic principles include how to manage accounts payable. You can no longer play the “hat game,” where all the bills go into a hat and you only draw out so many to be paid each week.

Managing accounts payable has a dramatic effect on cash flow. Keep in mind you’re in a business that collects for work performed after completion – and often not effectively as mentioned earlier. So having access to operating capital or cash flow is important (make that critical) to business health.


The statistics are clear for small business: The No. 1 reason for business failure is under-capitalization. Without capital (cash in the bank), you can have all the profitable work sitting right outside your door or in your shop, but you’ll have to close down the operation if you consistently can’t pay the bills on time.

How do you ensure this doesn’t happen to your business?

First, you must fix any accounts receivable problems you have. Then you must control expenses to match your cash resources while maximizing profits.

Second, accounts receivable and accounts payable have to be balanced carefully. If your accounts receivable are greater than your accounts payable, you must be able to sustain this negative balance with operating capital. Many small-business owners believe this is a good thing; they owe little and are owed more. Unfortunately, they need to realize controlled debt isn’t a bad thing for business. This is why it’s often a much better business decision to finance (lease or purchase) equipment rather than purchase it out of operating capital. Why?

  • You may have purchased the equipment to allow for more volume. If the purchase cost comes from operating capital and the equipment increases volume, your demands for more cash are now increased (more parts, materials, labor and supplies) and you quickly get in a poor cash flow situation.
  • Your purchase may not be fully deductible in the current year, even if you paid for it all in that year. Section 179 deductions have limits and rules about when purchases are placed in service. You could easily be required to depreciate the item over a five- to seven-year period while not receiving the benefit of the purchase when you purchased it.
  • The current financing rates available are very low, so it could easily be better for your business to keep your cash and use someone else’s money.
  • Taxes are accruing for employees. This small item causes the demise of many small and medium operations. Too often when taxes are due, the money has already been spent. And the penalties and interest in this area can be staggering.

Third, set up vendor accounts at the best terms you can get and forget about COD. This is critical for balancing cash flow and the relationship between accounts receivable and accounts payable. I’ve been in businesses where every vendor wants to be paid when they drop off their goods. This is a major operational nightmare to manage, and the costs are tremendous to your organization in both hard costs, checks, check fees, administrative time, etc.


Many shop owners want accounts set up this way so there are no surprises at the end of the month. But simply keeping proper accounting will provide your accruing balances at any time during the month. (Just don’t look in the checkbook for the balance; it isn’t all yours.)

If the reason vendors are requesting payment at drop-off is because you’ve been delinquent with their monthly accounts in the past, then it’s a much harder road to rebuild. But it must be rebuilt either with that vendor or with another over time.

In establishing a relationship with a vendor, it’s important to not only look at discounts, but also terms and services. The discounts and services aren’t part of the scope of this article, but the terms are. Obtaining increased discounts through payment terms such as 2 percent 10th Net 30 or 5 percent 15th Net 30 gives you an option when analyzing your cash on-hand situation. These accounting discounts are important, but maybe not on all accounts all the time if cash flow becomes a problem. In other words, when a bill is due, it may be better for your cash flow to not pay the bill by the 10th just to get the 2 percent discount but, instead, to pay the bill on the 30th. Having the cash on-hand may be more valuable than the 2 percent savings.


We also find that most owners and managers avoid making contact or even returning calls to past-due vendor accounts. This is a critical mistake. Every business experiences cash flow problems in its business life – especially in heavy growth periods and when sales fluctuate significantly month to month. If a problem occurs, call the vendor and let him know what’s going on before the bill is due. Be honest when you truly expect to pay the statement. This approach will go a long way in improving your business relationships with vendors.

Another consideration in cash flow management is how labor is paid for jobs completed. I’ve seen operations that don’t pay technicians for jobs until the vehicle is delivered and/or paid for. I don’t necessarily agree with this process, but I do recommend that all pay be at least a week behind, preferably two weeks.


Getting Paid
Many owners and managers don’t want to spend time realistically looking at their cash flow problems. But the process need not be daunting.

I’ve provided clients with manual cash flow sheets that allow them to identify their accounts receivable, realistic collection dates/amounts, accounts payable and payment options/dates broken down in weeks to see what their cash needs will be during the month. By starting with the current bank balance, you can calculate projected bank balances on a daily and weekly basis. For an example, see the chart titled, “Cash Flow Management Worksheet,” on page 78.


I’ve also distributed spreadsheets that perform the same process on a computer; most accounting packages will provide a cash flow report as well. The important thing is to use it consistently to identify a potential problem before it happens. This goes a long way in developing a solution.

Solutions are normally based on fixing the problem that caused the cash rationing. To get you started, here are some things you should do:

1. Implement a company payment policy. How often in other businesses does the customer not know what’s expected of him in regard to payment for a product or service? Do we allow ourselves to assume that although getting a collision repair done isn’t a common occurrence for most drivers (unless they have teenagers), they understand how payments are made? Has a customer ever come to pick up his vehicle and not known he was to pay his deductible or betterment to you? Why? Because you didn’t establish a mutual understanding with that customer about his responsibilities. Don’t assume (you know what that does) that customers know the rules.


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

  • Use a payment policy checklist with every customer upon drop-off or scheduling of the vehicle.
  • Review the policy over the telephone when delivery is scheduled.
  • Enforce the policy for everyone.

This payment policy can include a number of key points to establish expectations and ensure smooth delivery. It’s too uncomfortable for everyone when these expectations are brought up after the customer arrives, his ride leaves and he didn’t bring 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?


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 payments available for deposit. (Don’t forget to list these in the journal for each insurer.)

2. Implement company supplement policies. Every collision business can identify which companies they have little or no challenges with and which consistently cause a high level of stress and delay. Document this in an insurance journal. I’ve seen the greatest delays in the collection of supplements fall on our shoulders, not insurers. We can point figures, but as the saying goes, “If you point, there are still three fingers aimed at you!”


Here are some hints to lessen this challenge:

  • Always have the needed supplement figured before requesting it.
  • Always check your insurer journal to see what policies may effect the wording, rates and charges.
  • Don’t act as if you’re begging.
  • Document, document, document!

What to Do When Everything’s Due
OK, you’ve got your accounts receivable as up-to-date as possible, but you’ve got a big balance. You have payment policies in place and supplement disagreements are non-existent, but bills, payroll and taxes are due.


What do you do?

First, analyze your cash needs and project them as mentioned in the earlier section. Then consider whether you’re going to call vendors or establish a credit line with the bank. If you choose to establish a credit line, make sure your accounts receivable are real and will be collected. It’s very common for businesses to use credit lines to cover outstanding accounts receivable. Remember that just because the credit line is there, it isn’t OK to diminish the priority of expecting and maintaining current accounts.

The bank may offer you various options in establishing a credit line. One may be an overdraft option, which automatically kicks in and deducts funds from a savings or secured account when cash is needed to cover checks and debits. Another may be an automatic loan based on a “prime plus” interest rate and secured by a certificate of deposit or money market fund. Examine your options for the best terms, features and liquidity of the money secured.


Another option is to open a sweep account. This is beneficial when your business becomes “cash rich” and the capital in the account is greater than you need. These accounts allow you to earn some investment credit and/or reduce your banking fees.

All these options establish a strong relationship between your business and the bank, which is healthy for both of you. This relationship builds over time and allows for further business expansion and support.

This is also where calculating whether 1 to 3 percent costs (credit cards, DRP contracts with short payment terms, etc.) can benefit your business. If you can “turn your money faster,” your rate of return may become higher from investments.


Finally, if your business model requires extended periods of outstanding balances, as many businesses do, you need to plan accordingly and ensure capital is available to cover these longer periods. The question at this time is whether the money used for capital during these periods could’ve been better invested in something else with a greater return than the cost of the capital through a credit line.

All this financial management boils down to a very simple concept: Available Cash = Accounts Receivable Collected (including repair order balances) + Beginning Operating Capital – Accounts Payable Paid. To alter the equation, you either put more capital in, collect more money, collect it faster or pay bills differently with better terms to meet your cash flow needs. The choice is up to you. A


The Effects of Unclaimed Cash

It doesn’t take a lot of uncollected jobs or supplement disagreements to affect your bottom line. To illustrate, let’s look at an average repair that was originally estimated at $1,500 from an insurance drive-in claims center or an independent appraiser. By the time the vehicle repairs are completed, 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 doubt).

When the customer comes to pick up his vehicle, you collect his deductible and the insurance check for the balance of the original $1,500. The additional $300 is billed to the insurance company and becomes an immediate accounts receivable.


Job Breakdown


Gross Profit %

Gross Profit $





Metal Labor




Paint Labor













Sales Income:




The table shows you’ve achieved a 40 percent gross profit margin on this job. This may or may not be your target, but it’s a good example to use when demonstrating the loss of profitability if proper communication, authorizations and collection aren’t achieved.

Due to a misunderstanding or improper authorization, the supplement submitted is reduced. The following chart shows how losing $100 increments affects profitability:

Supplement Reduction

New Gross Profit $

New Overall Gross Profit %



34.40 %



28.90 %



23.30 %

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


If you re-adjust the sales income to match what you actually received for the final payment, you’ll notice a change:

Supplement Reduction

New Gross Profit $

New Overall Gross Profit %

– $100.00 (Sale = $1,700)

$ 619.50

36.4 %

– $200.00 (Sale = $1,600)

$ 519.50

32.5 %

– $300.00 (Sale = $1,500)

$ 419.50

28 %

As this example shows, collecting is very important to overall profitability. This example would also cause an effect on 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. Keep in mind that this will then provide a skewed view of each profit center.


View the Cash Flow Management Worksheet.

Cash Flow Factors

To properly manage your cash and have proper cash flow requires a clear understanding of what affects cash flow. The factors are pretty simple but often underestimated:

1. Owner’s Extras.

2. Accounts Receivable.

3. Accounts Payable.

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]).Visit his Web site at for more information.



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