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Feature   January 1, 2000   by Robert Wm. Greenwood

Danger Signals

Early warning signs of financial failure.


Watch for these signs of business trouble, which should set off alarm bells. The business you save could be your own.

With the holiday season behind us, this can be a good time to take stock of your overall business, to re-evaluate and review actual business performance compared to desired business objectives.

During this period of time, the level of auto service business activity sometimes trails off as the customer base focuses on other priorities.

For the auto service professional, it could be a good time to assess and review what’s been accomplished and what remains to be achieved.

Shop owners who monitor their numbers properly on a monthly, or at least on a quarterly basis, are in more control than they may think, should they study the trends revealed by their numbers.

When the important financial criteria or goals have been established for the business, then it is a matter of monitoring that criteria to see where the business is going in relation to the established objectives.

But when we see the following results occurring, alarm bells should sound in your head because the business is heading for cash flow and net profit problems, if it hasn’t experienced them already.

Low Sales & Ratios

When comparing year over year sales, or quarter over quarter sales against pre-established goals and ratios for the period, and finding them lower in relation to the objectives established, then management must examine its performance capability.

This involves a detailed analysis of management’s ability to govern the business. Analysis involves clearly looking at management’s overall attitude towards the business, including:

The shop’s current personnel in terms of quantity and quality of staff on hand.

The equipment within the shop required to reach its objectives.

The type and levels of inventory carried for the client base.

The facility in terms of functionality and whether it projects a professional operational image, and finally, the overall finances of the business.

When one or more of these are out of line, the shop cannot achieve its objectives or full potential.

Consequently, net profit is inadequate and cash flow problems start to arise.

Low Gross Profit Dollars & Percentages

The gross profit dollars earned on sales, the gross profit percentages made on each revenue category, and the gross profit mix of the shop, must also be analyzed.

When the gross profit of the shop is below the objectives desired, management must be capable of analyzing the factors that concern this issue.

For example:

Did management give the correct inventory values to the accountant? It’s important because the cost of goods sold on the financial statement is determined by taking the opening inventory plus purchases minus the closing inventory.

Sales minus cost of goods sold equals gross profit. Without the correct inventory values, the actual gross profit, and percentages, are affected. This consequently would also affect the net profit of the shop and in turn, the income taxes the shop pays.

Tax is a demand on cash flow that must be met, so an accurate inventory value is imperative.

Did management use enough care within its internal system to ensure that all parts and labour and other services was properly billed for on to the work order/invoice? Gross profit and net profit, as well as cash flow, can be affect in a very negative way when the shop purchases and installs items on the client’s car without accounting for it on the work order/invoice.

Did management change its buy/sell habits over the year compared to the previous period? Sometimes it can help to work closely with a jobber to enhance gross profit. Setting up a strong business relationship with the jobber can allow the shop to ensure it is buying right, in the right volume, at the right price, at the right time, which enhances gross profit, net profit, and cash flow.

Product sales mix in terms of dealer parts sold compared to aftermarket parts has an impact on the bottom line as well. Has it changed? Different gross profit percentages are made on dealer parts and aftermarket parts. There is a different labour rate for diagnostic skills versus maintenance skills. Knowing and understanding the sales mix trend can affect net profit and cash flow one way or the other. On the other hand, naivet of this knowledge can create management insecurity since management is not sure at all what is wrong.

When gross profit is not understood in a shop, net profit is affected.

When net profit is affected, cash flow dries up.

When cash flow dries up, stress increases and attitudes change.

Monitoring the sales mix and the maintenance and diagnostic labour revenue mix can provide management with an accurate client profile, which can be used to determine personnel and equipment requirements.

High Expenses

Monitor expenses to determine whether they are out of line.

The operating expenses must be examined to discover what expenses are controllable, uncontrollable or common sense.

Measure expenses against the type of clients the business wants to attract and the level of service the business is trying to achieve.

Many shops will clutter up their expenses, all with the purpose of saving tax, which in turn, clutters management’s ability to properly measure the business.

When expenses are out of line in relation to the objectives established, cash flow and net profit problems are right around the corner.

Accounts Receivable

This one hurts a lot of shops and is a major sore point for our industry.

Most owners perceive they must carry accounts receivable or they will lose all their customers/clients.

Under close examination, nothing could be further from the truth.

How can a shop offer the best quality of skill level, a high plateau of personal service, at a fair price for services rendered, and give unlimited, interest free credit?

It must be clearly understood that this is 1980s type thinking. Things have changed.

If the automotive maintenance and repair shop’s accounts receivable exceed 20% of the average monthly sales at any given time, cash flow and most likely gross profit and net profit have been affected.

Management is creating its own negative business circumstances by not changing the way it thinks about its business.

Late Accounts Payable

Management must consider it a serious problem when a shop can not consistently pay its monthly accounts when due.

In most cases it turns out to be one of two things, sometimes both.

Either accounts receivable is out of control or the right type of labour rate is not being charged out by the shop.

Net profit and cash flow management are the issues and they must be re-addressed in a new format if the business is to prosper and provide management with a professional personal income.

A Deterioration in General Business Attitude

Shop owners who think they have no room to improve must do some serious self examination.

Owners sometimes blame the customer, the staff, the industry, the supplier, or just the way things are, for their plight.

I’m sorry, but it is time to be blunt. Management’s thinking is wrong. Attitude does affect financial outcome.

If management will not step out of the box and learn how things could be, with a strategic plan to change, then there is no doubt that the business is heading for serious financial trouble. Management’s attitude will determine where the business will fit in over the next five to 10 years.

It will be management’s attitude that will determine whether the business will even be around within the next three years.

Management’s attitude will determine whether management is paid a professional personal income or buy themselves a job.

Attitude will be a key factor in determining which businesses survive and grow in the next century.

Measuring the business properly can reveal, in advance, where the business is heading.

It is definitely worth the time and investment to learn how this is done. Take control of your business’s destination because it has been
proven time and time again “If you can’t measure it, you can’t manage it”.


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