A necessity to cope with change
It’s that time of year for many shops across Canada — January/February — cash crunch time — the dreaded time of the year by so many.
Perhaps it would be wise to review methods to improve your cash flow and make them a policy to manage the shop by. Consider that a good cash management policy can enhance your bottom line over the course of a one year period.
You might want to consider how the following proven techniques work to speed up cash inflow into the shop:
1. Process invoices more quickly: In many shops old fashioned manual systems take forever to get the invoice out to the client who has an account with you. These old procedures actually hold up the collection process and hence slow down the inflow of YOUR cash. Consider a total review of your billing procedures in order to knock out unnecessary delays. Consider setting up an arrangement where your invoice is e-mailed directly to the clients accounts payable department where they can print the invoice off immediately to have a hard copy and the put it into the payable system for the next cheque run. This cuts down on stationary, postage, envelopes and the time to get the statement to the client.
2. Manage your Accounts Receivables: Make sure all invoices have a clearly marked due date on them. Deal with past due accounts and slow payers immediately and stick to it rigorously with no exceptions. Consider tightening up your terms. Consider changing your terms from 30 days to 20 days. Remember ‘credit’ is a privilege, not a right. You have served your customer/client with the highest quality/service standards so do not let them pay you with the lowest esteem standards.
3. Give priority to scheduling: Large jobs from prompt-paying clients deserve your attention first as they can have a significant impact upon your cash flow. That makes sense, however, the trick is to look at your scheduling methods to ensure all clients are treated with the right level of service and integrity that they deserve. Just paying attention to the big quick jobs can destroy your shops reputation, as ALL clients are important in varying degrees.
4. Review your pricing strategy and structure: Are your prices in line with the service/quality levels that you provide? Is your pricing in line with your costs of doing business? It is important to know all your variable and fixed costs so your pricing accurately reflects the true increase in costs. Do the math — what is your total cost per billed hour in your shop? Consider this cost pricing strategy — Next — In, First — Out (called ‘NIFO’) because it (the next cost invoice) accounts immediately for the impact of inflation in establishing the costs of doing business.
Those are some examples to increase the inflow of cash. Now consider the following to control the outflow of cash from the shop:
1. Time all your payments: Pay your suppliers invoices when they come due. If a supplier offers you discounts for early payments it is often wise to take advantage of them, even if you have to borrow to do so. Standard trade discounts can be the equivalent to as much as 36% a year.
2. Watch your shop operating expenses: It is wise to consider a cost/benefit policy and look at every aspect of your shop’s operation as it can alert you to opportunities for savings. Common sense has a lot to do with this analysis from the shop office to the front counter to the shop floor. Consider energy saving methods with things such as light, heat, water temperature and the consumption of each. Consider programmable timers for all. Consider additional weather proofing techniques around the shop. Again, common sense does rule in many cases.
3. Review your inventory: Excessive inventory that does not turn over represents cash sitting on the shelf. Work closely with your supplier to ensure what your stock turns over properly. When the right relationship is in place, your supplier can manage the inventory to accomplish the necessary objectives as a no cost added value to you. Reduction of inventories through proper management without affecting the level of customer/client service levels can substantially improve cash flow. The only way this works is by ensuring the right relationship with the right supplier is fully intact.
4. Examine your equipment and other fixed assets carefully: Replacement of old worn-out, outdated equipment often upgrades the efficiency of the shop. This may be a longer-term fix to cash flow but the point is, modern equipment is more efficient. When efficiencies increase, productivity increases which in turn provides additional cash flow. The key here is to work with your equipment supplier to develop a clear and coherent equipment/fixed asset policy in the shop.
5. Take advantage of tax breaks: Your relationship with your accountant is critical in that he/she should be aware, and advise you accordingly, as to options available to you in getting the most out of the various tax incentives offered by different levels of governments.
In conclusion, the only thing that is predictable about change is its constancy. If you learn this lesson then you will put yourself in a good position to weather any storm that may cross your path. As you know there have been many storms over the past three years. One of the advantages about being an independent shop is your ability to be flexible. But you must use that flexibility in order for it to be an advantage to you, thus, you must stay on top of change. This is why measuring your business is so critical today in order for you to see the trends that develop. ‘If you can’t measure it, you can’t manage it’. Developing a cash management strategy such as a constant review of all of the above will give you liquidity; liquidity protects you from economic setbacks. There is a saying: ‘to cope with change, you have to survive it’. The above points are simple in nature and not difficult to implement but today they are essential to survive in the independent sector of the automotive aftermarket industry.
Robert (Bob) Greenwood is President & CEO of E. K. Williams & Co. (Ontario) Ltd. and Automotive Aftermarket E-Learning Centre Ltd. Bob has 29 years of industry-specific business management experience. He has developed shop business management courses for independent Service Providers recognized as being the most comprehensive courses of their kind available in Canada. Bob is the first Canadian Business Management Consultant and Trainer to be recognized for his industry contributions when he received the prestigious Northwood University Automotive Aftermarket Management Education Award in November 2003. E. K Williams & Co. (Ontario) Ltd. offices specialize in the independent sector of the automotive aftermarket industry preparing analytical operating statements for management purposes, personal and corporate tax returns and business management consultation. Visit them at www.ekw.ca and sign up for their free monthly management e-newsletter. Automotive Aftermarket E-Learning Centre Ltd. is a leading edge company devoted to developing comprehensive shop management skills through the e-learning environment. Visit www.aaec.ca and take the free overview. Bob can be reached at (613) 836-5130, 1-800-267-5497, FAX (613) 836-4637 and by E-Mail: email@example.com or firstname.lastname@example.org
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