Going beyond the books

May 20, 2016
We want to manage P&M margins and since margins are the difference between sales and costs, we want to make sure our P&M costs are directly aligned with our P&M sales.

Accounting for paint and material (P&M) costs can mean different methods, reports or systems depending on who you are talking to. In the auto body repair business, everyone seems to know what P&M sales are, while the related costs — or costs of goods sold (CGS) — remain a bit more of a mystery. I pose that there are really two types of accounting for P&M costs.

One of my favorite old adages that again warrants repeating is, “You can’t manage what you don’t measure.” So let’s begin by talking about the first type of P&M accounting, the book keeping aspect. We want to manage P&M margins and since margins are the difference between sales and costs, we want to make sure our P&M costs are directly aligned with our P&M sales. P&M sales are fairly easy to figure out — on every RO there are subtotals on the bottom for the P&M sale. Let’s keep it simple and just use that. 

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There are several systems or programs for calculating the P&M sales, including the default calculation of $xx.xx dollars for every refinish labor unit billed. Other systems and methods include Mitchell RMC (Refinish Material Calculator) Paintex, PMCLogic and others. But for this article we are going to focus on the cost side.

Regardless of how you calculate the P&M sales, you still end up with a number on each RO. Everything included in that P&M sale on the RO should have a corresponding cost. Likewise everything not included in the P&M sale needs to be accounted for elsewhere.

So let’s start with your paint bill. Generally, shops purchase most of their paint and material from their jobber. With that assumption, we need to take all P&M costs billed by the jobber and post them to CGS against P&M sales. There are several methods some may work better than others.

Method 0: Take all the purchases from the jobber and post those to CGS for P&M. One potential problem with this method is the assumption that everything is truly a P&M cost. It almost always never is!

Method 1: Have the jobber bill everything on separate accounts for better tracking, one for taxable and one for non-taxable. Potential problems include a) some states tax all purchases; b) some states have no sales tax; c) some states tax items differently than other states; and most importantly d) this method is based on each state’s taxation method and likely has only a little to do with the corresponding P&M sale.

Method 2: Have the jobber create several accounts or subaccounts and bill items by these divisions. For example, typical subaccounts may include a liquid account (most likely almost all part of P&M cost) and an allied account (some of which is P&M cost and some of which isn’t). Often we see additional accounts set up for the Body and Detail departments. This is better than Method 1, but we still may not have as accurate a system as we would like. We are often counting on the jobber staff, a counter person, sometimes a driver to make judgement calls on which account to bill something under. While the breakdown of paint and materials into categories or subaccounts makes this is a much better method, and one that can be greatly improved with separate authorized stock lists for each account, this method limits what is purchased and also defines how to divide paint and materials.

Method 3: Use the great tools provided to us by the paint manufacturers, including scale or mix reports. Since liquids make up between 60 percent and 70 percent of our P&M costs, we can fairly quickly calculate those non-liquid costs and come up with a more accurate P&M cost. Great, right? Except a couple of quick notes: 1) Your paint staff needs to record everything on the scale, including clears, primers and sealers. This is the biggest potential for problems, despite what some believe, a large percentage of shops are not getting everything mixed on the scale. Most systems allow for mixing some products for multiple ROs (clear, and primer, for example) and may allow for the added entry of non-scale mixed products such as plastic adhesion promoter, GP solvents etc. 2) These mixing systems don’t know about your specific pricing on paints, though several systems allow for this added calculation. You will also need to input your allied percentage, or accept the system defaults.

Method 4: Have the jobber (either on their own, or with available third party help) create a list of all your purchases each month and break all items into several categories. First, break out everything into two main categories 1) P&M CGS and 2) everything that is not part of P&M CGS.

While we are breaking the purchases into these two main categories, it may be very worthwhile to further divide these categories for better accounting and comparative analytics. This works best for multi-shop operators or shops working with their jobber, paint manufacturer or 20 group and performing financial comparisons. For example, separating color and comparing dollars and volume spent per RO or per refinish labor unit may provide great insights as why one particular shop’s P&M margins are better than another. We can make similar comparisons to other P&M costs such as masking, abrasives, etc. We may have one P&M CGS general ledger account, and that account may have several subaccounts with which management can drill down into in order to better control costs and manage P&M margins.

Whatever method you choose, you should now be able to come up with a CGS for you P&M sales. And if you stay consistent, you can track it, manage it and hopefully improve it.

You should also break down those other non-P&M purchases into some meaningful accounting. This includes purchases of non-included items that are not part of the P&M sale and are specifically billed separately on each RO, including seam sealer, pin stripes, cavity wax, panel adhesive, clips and fasteners or fluids. Training, software, safety and shop supplies, which are also very commonly part of that jobber paint bill, also need to be accounted for separately. 

Be held accountable
The other type of P&M accounting is Accountability. For a lot of managers, accountability is a great tool and system to manage both materials and people. Keeping track of material costs as noted above provides a benchmark to measure against. The first step that most take in accountability is to track the costs with the person or team or department using the materials. Again, this works even better if you have some comparative data such as from your jobber, paint manufacturer or 20 group. If two team members doing similar work have substantially different cost profiles two questions come to mind: 1) Is one team member over using materials?; and 2) Is one team member skipping any required steps? Cheaper is not always better.

Often we see shops trying to hold personnel accountable with measurements of output — hours vs. dollars sold or hours verses material costs. This can obviously be done for both paint and body techs. Simple measurements such as dividing the material cost by the labor hours provide a good measurement of cost per hour. Comparing this value or KPI with other similar employees can help provide accountability.

These are great measurements and can be used prudently as a motivational tools or opportunities to address needed training. As long as the comparisons are for very similar work, comparisons need to be fair and consideration may need to be given for different work performed.

With the rapid pace of change and the need to continue to improve P&M accountability and performance, perhaps the least often used accountability — but perhaps deserving of consideration is the accountability of procedures and facilities. There is a measurable difference in both material use and productivity when painting parts on the vehicle verses painting parts off the vehicle.  Overcrowded shops loaded with vehicles not currently being worked on, such as those awaiting parts, approvals, etc., can tax the ability to move vehicles through the shop, tying up both space and time. Just  against dirt and imperfections or when SOP’s are in place and followed so that, for example, every job needs the same number of coats of primer to be properly sanded or blocked.

Perhaps it is time to measure and hold accountable our procedures and facility as well as people and products? Before you make a significant change in procedures for your facility perform several measurements or KPIs. Then after making the changes measure again. Hold the procedure and the change accountable. If the results didn’t reflect the desired change or improvement, re-examine the change.

Accounting is more than just debits and credits it is also accountability of people, productivity and procedures.

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