How to Read—and Use—Your P&L Statement
Mack Thomas, owner of Texarkana Auto Body Works in Texarkana, Texas, sat in his office analyzing financial data, as he does every month. He noticed the shop’s cost for paint materials had spiked to 8 percent, three points higher than his 5 percent target.
Thomas started paying close attention to his paint materials. One day, he even stood watch over the material cabinet for a few hours to observe his technicians’ use of the products. The culprit of the cost increase? Undercoat.
Each technician would have three half-used cans of undercoat sitting around their stall, Thomas says. After those partially used cans sat for awhile, they were useless, and it all just went to waste.
“It’s hard to notice problems like that if you’re not watching your financial numbers,” Thomas says. “You can’t get a grasp on those things if you don’t analyze your costs regularly.”
Understanding your financial data is crucial to the long-term success and health of your business. Whether you’re new to the financial aspect of the business, or just not as confident as you’d like to be about it, this quick primer of key terms and concepts can help make your basic financial data more useful. Knowing your numbers might just reveal some weak areas of your operation, and offer insight on how you may be able to add a few more dollars to your bottom line.
Profits and Losses
Collision shops generate a ton of financial data. And there are multiple financial statements that shop owners should look at monthly—budget, cash flow and balance sheets, for example. Since your bottom line is arguably the aspect that matters most, your profit and loss (P&L) statement is crucial to understand.
Elainna Sachire, president of Square One Systems Inc., a facilitator of 20 Groups in the collision industry, says the financial side of business is often uncomfortable territory for shop owners. And frankly, many shop operators don’t understand it at all, she says. They either don’t know what to look for, or don’t understand what they’re looking at.
they’re run by bodymen, not businessmen.”
— Mack Thomas, owner, Texarkana Auto Body Works
“The problem with many shops is that they’re run by bodymen, not businessmen,” Thomas says. For folks climbing the ladder from technician to management, understanding some basic financial information on the P&L statement creates a much clearer picture of what’s going on inside the shop.
First off, there are two types of P&L statements, accrual and cash basis. You need to know what type you’re looking at to fully understand the meaning of the numbers:
• Accrual statements. This includes all things that still need to be paid for by the business, and monies that are still going to be received, says Kirstin Klabunde, CPA, bookkeeper at Sharp Auto Body and a collision industry financial consultant. Essentially, accrual statements allow shop owners to look at profits and losses based on all expenses that have been incurred and sales that have occurred.
• Cash basis statements. This shows everything the business has already paid for, and all money that has been collected. It does not account for payments that have not yet been received, or things that have not yet been paid for.
Klabunde suggests using an accrual-based statement because it gives the most accurate reflection of the business’s financial situation, and that’s what your bank will ask for if you ever seek financial assistance.
Once you understand the type of statement you’re reading, there are four main components to consider:
• Sales. For body shops, sales consist of labor, parts, paint materials, sublet, towing, storage, glass, pin stripes, wheels and sublets, Klabunde says.
• Operating costs. Your operating costs are made up of two aspects: fixed costs—like electricity, heat, and insurance; and direct costs—costs that change based on your sales and production. A good target for operating costs is 32 to 35 percent of the total sales, Sachire says.
• Gross profit. Gross profit is the percentage of sales that’s left over after deducting your direct costs. For example, if you have sales, which would be 100 percent, and your direct costs are 52 percent, that leaves you with a gross profit of 48 percent. That 48 percent is what remains to pay for all your other fixed costs.
It’s important to know your gross profits because “it’s one of the biggest factors that will help you gauge where you’re at,” Klabunde says.
You can even dig deeper and find your gross profits in specific areas, like refinish labor or frame labor.
A good target for gross profit is 42 to 45 percent, Sachire says.
• Net profit. Your gross profit minus your operating costs gives you your net profit—the money that was earned for your business.
A good target for net profit is 10 percent, Sachire says.
Reveal Your Weakness
Sometimes you’ll see a difference between what your financial numbers are, and what they should be. Numbers that aren’t up to par likely signal a weak area of your business, and you’ll want to dig in and make improvements. Your investigations might just reveal a problem like theft or waste.
When Klabunde reviewed her shop’s financial data in September, she noticed the shop’s gross profit on paint materials had dropped unexpectedly. She went looking for answers.
— Mack Thomas, owner, Texarkana Auto Body Works
“We discovered that we did a lot of comeback jobs that required paint during that time period,” Klabunde says, noting how that dramatically increased the usage of paint materials. All those comeback jobs were clearly raising costs and reducing the bottom line.
So how exactly can you identify potential problems in your shop by staring at a set of numbers on a spreadsheet? Here’s what to look for:
• Know where your numbers should be. Sachire says good target financial numbers are developed from averages of shops that participate in 20 Groups. You can talk to your peers about their numbers, and see how they compare to your performance. If your peer’s gross profit, for example, is at 45 percent, and your number is at 35 percent, that’s a big, red flag that you may have a problem.
• Compare your monthly reports, and look for trends. Financial numbers vary slightly over certain time periods, but you should be able to identify some general trends, Klabunde says. Run your monthly report and compare it to the previous month’s report. You should be able to easily identify differences in your numbers from month to month. Those differences are good indicators of something you might want to look deeper into.
Accounting work in the collision industry can be a bit of a daunting task, especially since there are so many variables that play a role in shop sales and expenses. Fortunately, you don’t have to do this by hand; there are computer resources to help you.
Every shop should have an accounting system, Sachire says, noting that all the successful shops she has worked with have one. Your accounting system will pull critical data from your management system, and compile all the necessary reports that shop owners need to read.
Sachire suggests using either the QuickBooks or Peachtree accounting systems. More information on those resources is available at quickbooks.intuit.com, and peachtree.com. “Those are two of the easiest, simplest and most user-friendly systems available,” she says.
Some management systems do incorporate financial functions, but those programs don’t usually offer shop owners an accurate picture of the business. That’s because there are other entries in the accounting systems that affect those numbers, which management systems do not take into account, Sachire says.
It’s one thing to understand your financial numbers, but you also have to know whether those numbers are strong. There’s no better way to do that than by comparing your business to those of your peers.
Twenty Groups are a perfect place to start, and the strongest tool available to shop owners to get on the path toward financial success, Sachire says.
“The most important thing to do in order to get on the right path with your financials is to continually educate yourself,” says Thomas, who joined a DuPont 20 Group three years ago. His group meets for two days once a quarter—four times each year. And they spend a half-day just analyzing their financial statements.
— Kirstin Klabunde, CPA, bookkeeper at Sharp Auto Body
and a collision industry financial consultant.
Thomas says peer interactions were a huge factor in growing his profit percentage significantly. You’re able to talk to other shop owners who are doing very well, and find out what they might be doing differently, he says. That gives you some strategic ideas of things you could do to improve your own numbers.
Klabunde agrees: If you know what other shops of similar size are paying for certain things, that’s a good heads up to identify whether you’re overpaying for goods, or if other people are getting better deals on some of their costs. This can help you decide if you should be shopping around for new suppliers for particular business expenses, she says.
“Knowing your numbers is the key to knowing what’s going on with your company,” Klabunde says, noting that if you’re not paying attention to your numbers, you may not recognize the impact that cost increases have on your bottom line.
“Your business,” she says, “could be running away from you.”