Auto Service World
Feature   December 1, 2000   by Bob Greenwood

Are your accounts receivable out of control?

Do your accounts receivable cause your stress level to go up and your business relationships to go down?

Accounts receivable can act like a cancer in business: when they are out of control it affects the physical well being of management. Stress levels start to increase to unacceptable levels, and this in turn negatively affects management’s overall attitude towards business in general.

This is sensed by the staff and can raise their stress level as “uncertainty” settles in to their mind as to what is really going on, which in turn is sensed by customer/clients. And when “indifference” is perceived, a person has reason to seek an alternative shop to look after their vehicle, which affects the profitability of the shop, creating a situation where management can’t pay themselves a professional income. In the end the “home life” is affected because the owner is not happy with the business, which dramatically affects his/her personal family relationships.

Are you in this rut? This cycle should be unacceptable, and it is time to have the surgery, get rid of the cancer, and change!! It is time for management to earns his or her pay cheque and attack this terrible disease, which is creating this disturbing problem.

Consider that your accounts receivable, in an automotive maintenance business, should not exceed 20% of your average monthly shop sales. If they are higher than this, the shop most likely can not pay “all” accounts payable in full when due. This leads to the unavailability to take advantage of early payment discounts, not to mention a negative business relationship with suppliers. Being on “C.O.D.” is no fun, and can actually be an inconvenience to the business.

Consider that banking relationships with the business are strained because the “cash position” of the shop is very weak. The banks would like to see $2 in liquid cash for every $1 out on the books. Consider that in today’s business climate, the value of your time, capital costs required to run this business, and the daily operating costs including a high demand on competent staff wages, employer burden and benefits are all substantially different than they were 20 years ago. Consider whether it is worth it to tie up large sums of cash which become interest-free loans, and yet the shop has borrowed money through its business line of credit and pays the bank prime plus 2, 3 or 4 percent. Consider whether it is worth granting credit to people who only purchase low margin products, or 50% of their purchases are low margin products such as “shop specials”. You must work out the true profitability of each account. Consider if your shop is granting credit to a person or company that doesn’t have, or can’t get a credit card; WHY? If they have a credit card, why are they charging with you? Consider that in the independent sector of the automotive maintenance and service business, an accounts receivable that is 30 days old is worth only 95% of its original value, if it is 60 days old it is worth only 90% of its original value, 90 days old it is worth 75% of its original value, 6 months old is worth 40% of its original value, and if the shop discounted the parts and/or labour to make the sale in the first place because the commercial account “dictated” the conditions of sale, then the shop’s overall margin/gross profit drops substantially. Consider that if the shop is netting 3% of its total sales, and it incurs a bad debt of $500, then the shop must sell $16,666 dollars to make up for that one bad debt. ($500 divided by .03) Consider the following “credit costs”:

The independent sector must move on to more progressive ways of running their business. Perceiving that accounts receivable are necessary today to run a profitable business is, quite frankly, 1970’s and 80’s thinking. The numerous methods of payment at the shop’s disposal are quite incredible compared to the “old” days. Generic credit cards (Visa, Mastercard, American Express, Diners Club Enroute), Interac, aftermarket banner credit cards, deferred payments with 60, 90, or longer periods to pay interest free, are available to every business today. It is time to straighten out the finances of the shop, and take the necessary steps to do so.

Change is never easy in business, but change is no longer an option. Our industry is rapidly changing and so must every shop operator within the industry; our future depends on it.

It is time to make the year 2001 a more profitable, less stressful year. It is time to take responsibility and get focused on the customer/client needs and do an outstanding job in that area, instead of having to study his/her payment habits.

The time to move the business forward is NOW. The time for business change is NOW. Take the initial step and seriously consider it!!! “Who we are today is the result of yesterday’s choices. who we will be tomorrow is the result of today’s decisions.” SSGM

Statement Costs:
Envelope and statement55 cents to 85 cents
Postage46 cents
Value of your time (?)$______________
Collection Letter Costs:
Letterhead and envelope65 cents to 95 cents
Postage46 cents
Value of your time (?)$______________
Collection Telephone Calls:
Estimate of time5 to 15 minutes
Value of your time (?)$______________
Door Calls:
Estimate of time30 to 90 minutes
Value of your time (?)$______________
Vehicle expense (?)$______________
Bad debts (?)$____________
Legal fees (?)$____________
Collection costs (?)$____________
Value of lost customer/client (?)$____________
Owner/manager attitude deterioration(?)$____________
Cost of borrowed money to carry A/R (?)$____________
Profit lost due to payment history (30,45,90 days)(?)$____________



Dear (Client Name)

Thank you for your automotive repair and service business. Your patronage and consistent co-operation you have always given us is deeply appreciated.

We have given a great deal of time and thought lately to our present system of servicing credit worthy clients. After a considerable in-depth review, we have found that the increased cost of operating supplies, maintaining the best in high technology diagnostic equipment, contending with competitive marketplace salaries, and the costs of borrowing funds, forces us to terminate personal credit effective (Date). We will extend credit through the use of the various credit mechanisms we carry such as (List credit cards carried). Extended terms can be given through these facilities. For your convenience, we are enclosing a (List two credit card) application forms. Please fill out one of these application forms, return it to us and we will forward it to our bank with our personal recommendation. Other credit card applications are available at our service facility.

We wish to stress to you that the decision to make this adjustment to our credit policy within our business has been made only after careful consideration of all factors into the performance of quality services to you because we understand the future of our business depends on your trust and confidence in us.

We assure you that we will continue to serve you in our best professional manner and provide the type of
automotive service you, a truly valued client, have a right to expect.

Yours very truly,

(Business Name)


(Owners Name)

(President or Manager)