Greenwood’s Garage: Are you headed for trouble?

By Bob Greenwood

Shop owners who monitor their numbers properly on a monthly basis are more in control of their destiny than they may think. If they study the year-to-date trends that their numbers offer, they won’t be driving in the dark.

Establishing goals for a business is the first step toward success. But once those goals have been established, monitoring key financial criteria and making periodic adjustments is critical to reaching the target.

The numbers give you important insights into know where the business is going, and how well you’re progressing toward your objective. And just as there are signs when you’re making good headway, there are also signs when you’re heading toward cash flow restrictions and net profit problems.

Low Sales & Poor Ratios: When year-over-year sales fall short of your pre-established goals and ratios, it’s time for management to take a close look at its own ability to turn the situation around. This involves a detailed analysis of the governance of the business.

Is your management ‘attitude’ right? Do you have the correct quantity and quality of staff in place? Do you have the necessary equipment to get the job done? Are you carrying the right type and levels of inventory for the client base you serve? Is the facility itself up to job? Does it have the functionality you need? Does it project a positive, professional image?

When you’ve covered these basics, it’s time to review the overall finances of the business to see if one or more of lines are clearly out of whack.

Low Gross Profit Dollars and Percentages: You are going to have to analyze three things very carefully: the gross profit dollars earned on sales, the gross profit percentages made in each revenue category, and the gross profit mix of the shop. When the gross profit of the shop is below objective, it’s time to start asking some tough questions.

Did you capture the correct inventory values? Remember, the 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 the gross profit made. Without the correct inventory values, the gross profit numbers and percentages won’t be accurate. This would also affect the net profit of the shop and, in turn, the income tax that the shop pays.

Is carelessness creeping into the business? Do you have sufficiently tight internal controls to ensure that whatever goes into the client’s vehicle is recorded on to the repair order? Too often there are items installed on a client’s vehicle that never make it onto the RO. You paid for those items, and for the labour that installed them! That will dramatically affect gross profit and net profit – and of course cash flow.

Did you change your buy/sell habits over the past year? Working closely with a single jobber can enhance gross profit dramatically. Setting up a strong business relationship with your jobber will ensure you’re buying right – in the right volume, at the right price, and at the right time – which enhances gross profit, net profit, and cash flow.

Has the product mix of the shop started to change? Periodically monitoring the mix of dealer parts and aftermarket parts sales is necessary. And knowing the revenue mix of maintenance, diagnostic, and reflash work will allow you to see what type of clients you’re serving. It will also give you a better idea of what kind of future personnel you’ll need to do the job right the first time, as well as the equipment the shop will need.

Product mix affects gross profit, since different gross profit percentages are made on dealer parts and aftermarket parts. And there’s a different labour rate for diagnostic skills versus maintenance skills.

Understanding the sales mix trend gives you the opportunity to improve net profit and cash flow. Naivety of the prevailing trend, on the other hand, can create management insecurity. When gross profit is not understood in a shop, net profit is affected. When net profit is affected, cash flow dries up. When cash flow dries up, stress increases, and attitudes sour.

High Expenses: Are business expenses out of line? Operating expenses must be examined to discover what is controllable. Some things may be out of your control, or may constitute common sense expenditures in order to attract the type of clients and the level of service you’re trying to achieve. Many shops will clutter up their expenses, all with the purpose of saving tax. Unfortunately, this tends to clutter management’s ability to properly measure the business.

Accounts Receivable: This one hurts a lot of shops and is a major sore point for our industry. Most owners think they must carry accounts receivable or they will lose all their clients. Under close examination, nothing could be further from the truth. Commercial receivables must be managed properly. How can a shop offer the best quality of skill level, a high plateau of personal service at a fair price, and give unlimited interest free credit? This is 1990s era thinking! Things have changed. If the automotive maintenance and repair shop’s receivables exceed 20% of the last six months average monthly sales, cash flow (and most likely gross profit and net profit too) will be 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, there is clearly a very serious problem that is not being addressed. In most cases it turns out to be one of two things, or even both. Accounts receivable are out of control. And the right labour type and labour rate is not being charged out. It’s time for management to learn how to run the business all over again… this time reflecting the “new aftermarket” way of doing things.

Deterioration in General Business Attitude: Shop owners who truly think nothing can be done to improve their lot must understand it’s time to look in the mirror. We’ve heard so many times from owners that the problem is today’s demanding clientele, or pampered staff, or the dying industry, or greedy suppliers. I’m sorry, but it’s time to be blunt. Management’s thinking is simply wrong.

The attitude that management have directly affects the financial outcome of the business. If management will not step out of the box and learn how things could be, with a new strategic plan, then there’s no doubt that the business is heading for serious financial trouble.

Attitude will determine where the business will fit in over the next three to five 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, or buy them a job. I believe attitude will prove to be the critical factor for business survival and business growth in the next five years.

Measuring the business properly can show, in advance, where the business is heading. 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.”

Bob Greenwood is an Accredited Master Automotive Manager (AMAM) who offers personal business coaching and ongoing management training for aftermarket shops, focusing on building net income. He can be reached at 1-800-267-5497 or greenwood@aaec.ca.