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Study shop numbers to be aware of negative trends

Thursday, November 17, 2016 - 09:00
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Shop owners who monitor their numbers properly should they study the trends that their numbers tell them.

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Once the right key financial criteria and goals have been established for the business, it is a matter of monitoring the criteria to see where the business is going. It is when we see the following results occurring that we know the business is heading for — or has — cash flow and net profit problems.

Low sales and ratios

When year-over-year sales and pre-established goals, ratios and billed hours are lower than the objectives established, management must examine its capability of performance. This analysis involves clearly looking at management’s overall attitude; the shop’s current personnel; equipment; inventory carried; the facility in terms of functionality and image; and the overall business finances. When one or more of these are out of line, the objectives and potential of the shop cannot be met. Consequently, net profit is not made, and cash flow problems start to arise.

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Low gross profit dollars and percentages

The gross profit dollars earned on sales, the gross profit percentages made on each revenue category and the gross profit mix of the shop must also be analyzed.

Did management give the correct inventory values to the accountant since cost of goods sold on the financial statement is determined by taking the opening inventory plus purchases minus the closing inventory? Sales minus cost of goods sold equals gross profit made. Without the correct inventory values, the gross profit numbers and percentages are affected. This also affects the net profit of the shop and income taxes the shop pays. Tax is a demand on cash flow that must be met, so an accurate inventory value is imperative.  

Does a lax internal system not ensure that whatever goes into the client’s vehicle also gets on to the work order/invoice?

Did management change its buy/sell habits from the year or period before? A strong business relationship with the jobber can allow the shop to ensure it is buying right, in the right volume, at the right price and at the right time. 

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