Elainna Sachire, president of Square One Systems, Inc., was kind enough to talk to me recently about some of the major pitfalls she sees tripping up many shops. Her company oversees about almost two dozen 20-groups, helping a combined 450 shops improve their financial performance. Here are her other suggestions for things shops should work to avoid.
Letting accounts receivable slide
One reason Elainna wants to see your company’s balance sheet is to see “what your company’s accounts receivable are running, and if you are doing a good job collecting your money,” she said.
Receivables shouldn’t be an issue in this industry, she argues, because unlike a dentist or lawyer who may let customers pay over time, insurance companies often cut one check for the claim. Shops just need to make sure they are collecting promptly.
To do that, she suggests, stop looking at receivables as 30-, 60- and 90-days-old. Look at them as 15 days, 45 days and 60 days.
“If your system is to wait until they reach 31 days, the odds are you’re actually not calling for another week or so after that,” Elainna said. “Then how long after the call is it going to take to get the money? Your ‘30 days’ suddenly becomes 45 days.”
Make that call after 15 days instead, she recommends, so you get paid within 30 days. Top performers that we work with have accounts receivable that are 15 days or under.
“If you can cut two weeks off your accounts receivable, that’s critical to cash-flow,” Elainna said.
Lacking a detailed chart of accounts
One of the most powerful things a consultant or a 20-group can help you develop is a financial chart of accounts that allows you to precisely see where you’re making or losing money. Elainna and I often see shops dumping all labor into one bucket on their P&L, for example, not breaking it out by body labor, refinish labor, mechanical labor, frame labor, etc. Even shops using a professional accountant often lack a detailed chart of accounts that breaks down the categories of income and expenses.
“But it’s like the foundation when you’re building a house,” Elainna suggested. “You can’t be ‘expense-efficient’ without a thorough understanding of what your expenses are.”
One tip-off she looks for: A “miscellaneous” category on a P&L that has a large dollar amount associated with it.
“There shouldn’t be much that you can’t place into a specific category,” she said. “When I see that, I will immediately question the accounting process of that shop.”
Forgetting to focus on gross profit as a percentage of sales. Elainna acknowledges the industry has seen erosion of labor gross profit over time. But shops still need to work at maintaining it, and she’s seen many that do. How are they doing it?
“There are things insurers may not be willing to pay for, so you need to pick your battles and bill for other things you are doing on a regular basis,” she said.
It’s all about writing a good, thorough sheet, she said, with all work performed itemized.
Not hitting the net profit benchmark. Year-in and year-out, in good sales years and bad, you need to hit a net profit (before taxes, amortization, depreciation and interest) of at least 15%, Elainna tells the shops she works with.
“Some of our really top performers will be a little bit above that,” she said. “But 15% is a very good, achievable number.”
She doesn’t buy the argument that, “My sales are down 6%, so I can’t make any money this year.” She’s seen shops be well into a down year yet still not have made any staffing adjustment.
“If I’ve been at $3 million in sales the last three years, and I have x amount of people, but this year I’m only going to finish at $2.7 million, why would I have the same number of people,” she said. “We didn’t make the decisions we needed to make. Shop owners will sometimes say, ‘But, Elainna, what if we get hail?’ I say, ‘Okay, but what if you don’t? If you do, you will figure it out. You always do.’ But I’ve seen shops that only get hail every three or four years still banking on it every year.”
My overall take-away from my conversation with Elainna is this: Few collision repair businesses end up in a strong financial position by accident. It takes work and time to build it out. Top performers don’t get there overnight.
“You become what you think about,” Elainna said. “It isn’t always as complicated as shops sometimes think it is. You have to put some time into it, but it’s not that complicated.”
