“I was going to do 10 percent better,” Jim Smiciklas said to himself.
Or, so he thought.
The year was 1995 and Jim Smiciklas was heading into his first finance meeting as a body shop manager for a dealership. The task at hand? To forecast finances for the next year.
The meeting came and went, but Smiciklas knew his numbers were off when his boss called him to stay after the meeting to chat. He learned his first lesson in finances: It is necessary to forecast sales based on the trends from last year, and not every month will do as well as it did before because things like natural weather events are random.
Smiciklas says he went back to the drawing board and, at the end of the year, was only $2,000 over in prediction of the gross profit.
Since his first foray into collision repair shop numbers, Smiciklas now owns Express Collision Center in Las Vegas. He has spent years providing financial consulting in the industry.
“In all businesses, your results are partially driven by being measured and that is if you don’t measure normally, you will not hit the goal,” says Darrell Fleck of RMJ Capital. “Think: The squeaky wheel gets the grease.”
A shop’s financial statements are part of what becomes an owner’s performance review. At the end of the day, no one is going to sit down with the top boss and give him or her a performance review.
According to Smiciklas, Fleck and Katherine Fossler, associate director of the Small Business Development Center at the University of Wisconsin–River Falls, it is important for a business owner to not only gain a financial report from a management system or employee, but to also understand each area of the sheet.
Here are some common areas that shop owners may be overlooking.
1. Payroll Configuration
Is the shop hiring contract workers or contract employees? Fossler says it is better for a shop to have a payroll category that is able to ebb and flow along with the amount of sales coming into the business.
She says to find what percentage of profit is typically allocated to payroll in the industry. For the restaurant industry, for example, typically 50 percent of profit is allocated to payroll.
2. Overhead Expenses
Overhead expenses like mortgage, rent or advertising can be a cost trap if they go unwatched, Fleck says. For example, advertising to the public all year is not wise long term, but advertising to the insurance industry year-round can be profitable.
Smiciklas says it is important for people to remember that they cannot spend more than they have.
“A lot of businesses do not even have a savings account and that is a big difference,” Smiciklas says. “You have to make more than it takes to pay your bills.”
To cut down on costs at the start of his business, Smiciklas worked as a technician and owner at the same time when the shop was in its infancy.
3. Inventory
Fossler says that inventory is an area on a financial report in which money can get “tied up.” The shop might have cash flow but not have cash on hand because it is tied up in accounts receivables.
She says it is vital for an owner to calculate the cost of goods sold. This is where someone can take gross revenue and subtract business expenses from the revenue.
4. Break-Even Point
If a shop is full with sales and has maxed its capacity, then the gross profit goes straight to net profit once the shop passes its break-even point, Smiciklas says.
For example, say a shop generates $200,000 in sales per month. If the net profit percentage is 20 percent, then the shop only makes $40,000.
5. Vendors
Smiciklas says that a common cost trap is not evaluating a shop’s vendors on a regular basis. For instance, if an owner negotiates a discount at the beginning of the business relationship, that is not enough. Periodically, the owner needs to check if the shop still receives the discount and not just assume it is in place.
6. Sales
Fleck says one aspect that is often overlooked in the sales area is not monitoring this section daily. Are the parts on site to keep the body technicians working?
He says the downside to waiting to measure sales at the end of each quarter is not noticing soon enough that sales are downtrending. If sales were downtrending and payroll was not adjusted as a result, then the shop would not turn a profit that quarter.
For example, if a body shop has a porter who washes a car when the vehicle is through the repair but sales are downtrending, that employee could be idle in work for three days or so, Fleck says. When a shop owner watches sales on a day-to-day basis, he would know he doesn’t need a porter for one or more of those days.
7. Fixed Versus Variable Costs
Fleck says examples of fixed costs include rent and utilities, which are expenses the shop needs to pay every month, regardless of the profit.
Variable costs could include marketing expenses or negotiating a price point, like the price of a lease before the contract is signed, Fleck says.
Shop owners need to spend more time looking at how much is spent in fixed versus variable costs because this is the area in which payroll bonuses are determined or when to allow employees to take paid time off.
