Struggling businesspeople can often be heard reciting all the reasons they aren’t making enough money. When pressed, however, they rarely know how to make money. In fact, they usually can’t even tell me what their revenue is so far this month or how much they need to make to be profitable!
Look, I agree. It’s tough out there. But I really believe the ones doing most of the complaining are often the ones who need to do most of the learning! In most countries, we have been given the legal right to open and conduct a business, however… We do not have the right to operate a business successfully, unless we learn business skills! More precisely, financial skills.
Let me take you back to 1991…
There I was on another typical gray, rainy, Oregon afternoon. I was traveling at a speed which felt dangerously high for my Mazda pickup. I knew the I-5 corridor very well from the many trips between my shop in Salem and Portland, where all the large dealership parts warehouses were. I knew where most of the cops would hide. On that particular day in 1991, though, I was looking extra hard for them because I had my name painted down the entire side of the truck, “Luehr’s Auto Body” in bright colors. Plus, I really couldn’t afford to get caught… Here’s why.
You see, 30 minutes prior, I was notified by my receptionist that I didn’t have enough money in the bank to meet payroll today unless the blue 1986 Buick got picked up and fully paid for!
The only problem was that we didn’t have the parts we needed to finish the Buick! Thank God Ron Tonkin Chevrolet had these parts in stock. Now, if I could just get to Portland and back in just under 2 hours, we may be able to deliver the car, get the check, and race my employees to the bank so their checks would clear!
The ridiculous thing? This was not the first time this race had taken place… no, far from it. If I was going to survive in business, this madness had to stop!
This was when I decided to take personal responsibility for my financial incompetence and learn how to take back control of my business by knowing, proactively and in advance, what my financial situation was going to be each and every day so that I could make adjustments and take action in the moment to “make my month” every day.
If you can relate to my story, or if you often say things like, “I can’t make any money.” I want to ask you something: how do you know?
The truth is that a huge percentage of the shops I talk to in North America are simply not equipped with the financial knowhow required to be highly successful in today’s challenging marketplace. They think they are not making money because the checkbook is out of checks! It is a shame that shops continue to struggle with this, because it is a relatively easy fix if they are willing to put forth some effort into learning.
If you are anything like I was way back in my early business days, you can, and you must, seek to acquire a basic understanding of how to operate a business by the numbers. If a guy like me, who barely made it out of high school, can run a successful business by the numbers, so can you! Here are some suggestions to get you started.
While I recommend shop owners learn as much as they can about the financial side of their business, I believe they should at least learn the basics. The more advanced stuff can be outsourced in many cases to trusted partners such as bookkeeping services or Certified Public Accountants. If you need help getting started or need an ongoing financial expert, we at Elite Body Shop Solutions also have advisors that can help.
Or maybe you are like me? Once I learned the basics, I became addicted to mastering the financial stuff! After all, once you master the math, you can master the money!
So, what are the basics? To begin with, a shop leader needs to understand these 4 things:
- Profit and loss
- The difference between profit and cash
- 5 daily numbers
Profit and loss
Profit and loss is the simple equation that shows revenue coming in the various departments like parts, labor, materials and sublet, then subtracts the expenses involved, thereby leaving a profit or a loss in revenue. The bottom of a P&L statement shows your net profit.
Profit and loss statements are usually produced each month, after the month is over. This is a great way to analyze past performance; however, it is a history report. Smart operators also use the same basic P&L structure to analyze each job during the month. This is an opportunity to check profit centers such as parts, labor, and materials on each job so shops can optimize profitability on each job before it’s too late. This practice, commonly called job costing, is a proactive approach and is a critical component of running a business by the numbers.
The profit and loss statement, (AKA P&L or Income Statement) is a document that most shops produce monthly to show operating performance. This document will indicate if the business is operating profitably or not; the only problem is that, as important as this information is, it doesn’t tell the whole story.
The difference between profit and cash
It is important to know the difference between profit and cash. I know many businesses that are actually profitable, while running negative cashflow. That is something I learned the hard way back in 1991. I grew my business so fast that I had too much work in process and ended up draining all my cash. In other words, I was buying parts and materials for cars I wasn’t going to begin repairs on for several more weeks.
Another area that chews up cash in an otherwise profitable business is accounts receivable. I learned early on that I needed to keep my paperwork and supplements in real time with the vehicle repairs so I could keep A/R to a bare minimum!
What is breakeven? My friend Bruce King describes breakeven as the day of the month where you make exactly zero money! As funny as that sounds, he is exactly right. Breakeven is usually described as a moment in time, typically a day in the month, when the shop has earned enough gross profit from revenue to meet the shop’s indirect costs.
Simply understanding a shop’s breakeven number allows proactive action from management to reach the number as early in the month as possible and to start accumulating profit during the remaining days in the month. And… unless a shop owner knows his or her numbers every day along the way, compared to a goal, the shop is flying blind!
Finally, there are several numbers that shop owners should keep track of every single day!
5 Numbers You Need to Know Every Day
- MTD Revenue vs. Goal
- MTD Labor Hours vs. Goal
- MTD Deposits vs. Goal
- WIP vs. Goal
- Scheduled WIP vs. Goal
See this recent article to learn more about these 5 numbers.
Wrapping It Up
I don’t want to come off too harsh here, but it is critical for shop leaders to understand this. We work in a time and in an industry that is becoming dominated by “businesspeople” who understand how to run businesses by the numbers. Financial incompetence is no longer an acceptable excuse for poor business performance primarily because the education is so widely available. Whether a shop owner chooses to obtain some basics and then outsources the complicated stuff or wants to master it him or herself, it is time to start creating a prosperous financial future!
Like I said, if I can learn this stuff so can you!
We’re here to help.
For help finding a financial expert who also understands our unique industry, email us at firstname.lastname@example.org.
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