Shop owners who monitor their numbers properly should they study the trends that their numbers tell them.
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.
Has the product mix of the shop changed? Monitoring the dealer parts and aftermarket parts sales mix and the maintenance and diagnostic labour revenue mix can allow management to see what type of clients it is serving, what kind of future personnel and training will be required to do the job right and the future equipment that will be necessary for the shop. Product mix affects gross profit, since different gross profit percentages are made on dealer parts and aftermarket parts. There is a different labor rate for diagnostic skills versus maintenance skills.
High expenses
Are the expenses out of line? Examine operating expenses to see which are controllable, uncontrollable or common sense and measure them against the type of clients the business wants to attract and the level of service the business is trying to achieve.
Accounts receivable
This one hurts a lot of shops and is a major sore point for our industry. Most owners perceive that they must carry accounts receivable or they will lose all of their customers/clients. Under close examination, nothing could be further from the truth. How can a shop offer the best quality of skill level at a fair price for services rendered and give unlimited credit and do it interest free? It must be clearly understood that this is an old type of thinking; things have changed. If the automotive maintenance and repair shop’s accounts receivable exceed 20 percent of the average monthly sales at any given time, cash flow and most likely gross profit and net profit have been affected. Management is creating its own negative business circumstances by not changing the way it thinks about its business.
Accounts payable not current
When a shop cannot consistently pay its monthly accounts in full that are due, management must understand there is a serious problem that is not being addressed. In most cases, it turns out to be one of two things, or even both. Namely, accounts receivable are out of control, and/or the correct and type of labor rate is not being charged out by the shop. It is time for management to learn how to run the business all over again in a “new millennium” way of looking at and doing things. Net profit and cash flow management are the issues, and they must be re-addressed in a new format if the business is to move forward and at the same time provide management and staff with a professional personal income.
A deterioration in general business attitude
Shop owners who truly think nothing can be done to improve their lot must understand it is time to look in the mirror. We have heard so many owners place blame on the customer today, the staff, the industry, the supplier or that it’s just the way things are. I’m sorry, but it is time to be blunt: management’s thinking is wrong. Management’s attitude affects the total financial outcome of the business, and if management will not step out of the box and learn how things could be with a strategic plan to change, then there is no doubt that the business is heading for serious financial trouble.
Management’s attitude will determine where the business will fit in over the next 5 to 10 years. It will be management’s attitude that will determine whether the business will even be around within the next three years. It will be management’s attitude that will determine whether management is paid a professional personal income. It will be seen that management’s attitude will be THE factor for business survival and business growth in the next century.
It is definitely worth the time and investment to learn how this is done. Take control of your business’s destination, because it has been proven time and time again “If you can’t measure it, you can’t manage it.”
