The Importance of Profit and Loss Reports
Profit and loss reports are a common thing to not understand for new business owners. Getting those right and learning the ins and outs of money can help struggling small business owners start to flourish.
A common problem among owners of auto repair shops—especially owners who don’t have a business background—is that some of the expenses and profits are not understood fully or organized correctly. Hiring someone to go through that can leave money on the table, as the taxes will be dealt with correctly, but much more is going into it.
Greg Lobsiger, owner of Loren’s Body Shop in Bluffton, Indiana, knows a thing or two about this from experience. Lobsiger was a struggling repair shop owner until he took a closer look at his finances. He realized he was losing money by not paying close enough attention to his finances.
“Single shop owners or guys that own up to four or five shops, I would say that over 50 percent of those guys have no idea how to read their profit/loss statement,” Lobsiger says.
The problem comes in a few forms, starting with a lack of a business background. Often, repair shop owners will start as technicians who want to move up and control their own shop. For Lobsiger, this was the case.
“The problem with the independent guys is they’re similar to my situation where I started out as a technician,” Lobsiger says. “A lot of these independent owners who are former technicians who maybe had an entrepreneurial spirit end up opening their own shop, but no one ever taught them about the business side.”
Not understanding the numbers in reports leads owners to ask their certified public accountants (CPA) to review and close their books each month. Lobsiger sees a problem because it isn’t the CPA’s job to make money for the company but to keep it from getting into any tax trouble.
At the end of it all, this ends up costing owners when instead they could be taking that time to educate themselves. Handing everything off to a CPA can be a big mistake and can cause unnecessary financial stress to struggling businesses.
Lobsiger says he doesn’t want to diminish the value and importance of CPAs but that they’re being used for extra reasons.
“Their job is to keep us legal,” Lobsiger says. “They’re not our [chief financial officer]. There’s a lot of shop owners that don’t know what to do, so they just let their CPAs handle it.”
Taking measures to understand what is going on with your business and money is a big step to bringing in the most possible revenue and getting things organized perfectly.
It is a very important problem that Lobsiger has run into often. He has looked over profit and loss reports of auto repair shops and had trouble comprehending them because of how unorganized they were. He says it’s all about staying in control of your finances.
“The more that the shop owners stay in the dark and don’t understand how to be businessmen, the more that the insurance companies can still be in control because they are businessmen,” Lobsiger says.
The words from Lobsiger don’t come from a place of malice. His understanding of these issues comes from a ton of time and energy spent on the topic. It’s not easy, and it’s not cheap to invest in educating yourself and organizing your books.
Starting in 2008, thanks in part to a call from a consulting company out of California, Lobsiger started educating himself and working toward understanding profit and loss reports and setting them up in a way where he wouldn’t lose out on money. Along with other changes throughout his business. Lobsiger is adamant that the investment paid off.
“I know what it is to not make money in our industry,” Lobsiger says. “With becoming educated — and it doesn’t happen overnight — for me, I probably spent $200,000 at least in coaching. More than just understanding my [profit and loss report] but how to become more efficient, eliminate waste, and continue improving at all those other things inside my shop.
“But it was worth every penny.”
There isn’t a specific key to becoming a more efficiently run and smarter business, but there are some red flags that can jump out within profit and loss reports. One big problem is how a repair shop tallies its expenses and revenue.
Lobsiger’s experience helping repair shops has shown him some bad habits when setting up a profit and loss report. Sometimes, shops will add up all their expenses and revenue and put it all into one line of total profit.
The organization gets lost here. Lobsiger says you need to separate costs and revenue and categorize them. Remembering how much money each specific thing costs you should be a priority.
For example, you need to have different things listed as a percentage of sales. Parts, labor, paint material, and more must be broken down by themselves. This will make it easier to read and make adjustments to your business. Some of these categories should be broken down even further, like labor.
Is it body labor, frame labor, mechanical labor, refinish labor, or detailed labor? Being able to pinpoint where each sale and cost goes is key to being able to read profit and loss reports without getting confused. Lobsiger says it should not be complicated if you set it up correctly.
“By having a [profit and loss report] set up correctly, it’ll actually almost talk to you,” Lobsiger says. “It will tell you, ‘hey, this area’s a problem.’”
This is not just sales but also costs of the same areas. In another spot on the report, the cost corresponding with each sale should be listed to see the gross profit in that area. This will help shop owners make adjustments and see exactly where their money comes from.
Understanding profit and loss reports should be important for any business, with no difference in the auto repair industry. Struggling businesses who don’t understand exactly how these work or the best way to read these reports can fall behind and continue to struggle.