As a shop owner, you follow your usual procedures. From employee handbooks to clock in and clock out guidelines, you try to account for every possible detail.
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But what about your cash flow procedure? When it comes to where your business’s money goes, you will need a smart strategy in place.
Chris’s insights will help you take the emotion out of controlling your shop’s cash flow!
But before focusing on the topic of cash flow management, it’s important to establish some target margins for your shop.
Target margins for your auto repair shop
Do you know what your shop’s current margins are?
From gross profit to labor, parts and beyond, Cotton recommends the following targets:
If your numbers fall far below these benchmarks, don’t panic! Cotton will cover how you can improve your margins in more detail.
Now, to the topic of your shop’s income statements. Why do guardrails even matter?
Why you need guardrails for your shop’s income statement
It’s tax season. You receive your shop’s tax bill from the government.
“That number can’t be right!” You owe thousands of dollars and never saw it coming. How did you not prepare for this? Do you even have enough money saved away to cover this expense?
If this nightmare scenario sounds familiar, it’s time for a change. To avoid ever putting yourself in this situation again, Cotton recommends establishing guardrails to track and measure where your shop’s money goes.
“Make sure you actually have the cash that your income statement says,” says Cotton. Put the shop’s income in the right place to work for you, and you will always have cash available whenever unexpected bills pop up.
Staying on this saving theme brings us to our next cash flow lesson: your shop’s sales tax doesn’t belong to you.
Remember: your shop’s sales tax doesn’t belong to you
It’s easy to forget that the extra sales tax listed on a customer receipt doesn’t belong to your shop.
But it’s important to remain mindful of the role this money plays. As Cotton describes, it is simply a “pass through.”
“When I say sales tax, I mean sales tax for the business. This is a tax account that we’re going to set aside to pay your tax liability for the end of the year,” says Cotton.
So what does Cotton recommend doing with that money?
Since the sales tax technically isn’t yours, you need to set it away for a later date. That money should go directly to a separate bank account, out of sight and out of mind.
Cotton establishes 5% as the cash flow allocations you should set aside to pay the government come tax season.
Here are four easy steps to manage that process:
- Put 5% of all sales into a separate bank account
- Ask your accountant how much you owe in taxes at year-end
- Take this money out of the account and pay your government tax bill
- Pocket whatever is left in the account as pure profit
Don’t let taxes ruin your Valentine’s Day, like Cotton’s experience after receiving a surprise $16,000 shop bill!
Beyond sales tax allocations, Cotton shared other allocation benchmarks to strive for. Those include:
- Operating expenses = 20%
- Parts = 20%
- Payroll = 30%
- Profit = 25%
“With this model, we are putting 25 cents of every dollar that comes into the business into a bank account for profit,” says Cotton.
Do your margins currently fall far below these benchmarks? If so, your income statement needs some reorganization.
To start that process, you will have to break out different categories on your income statement.
Breaking out your income statement categories
Revisiting your income statement doesn’t have to feel overwhelming.
Cotton recommends keeping the process simple. Get out four to six different colored highlighters and go through line by line.
Break out the income section of your statement into five different categories, including:
- Parts
- Labor
- Tires
- Sublet
- Shop supplies
Your statement should feature vertical columns for income, cost of goods sold (COGS), expenses and payroll. Overall, keep things brief. Your statement doesn’t have to sprawl page after page.
“My ideal income statement is two pages or less. If you have an income statement that is five pages long, you have way too many categories in there,” says Cotton.
You have reviewed the statement, broken out new categories, and sliced up the format. Now, the hard part: evaluating the current percentages to allocate for each category.
Finding (and adjusting) your allocation percentages
Using this format, you take a look at the current percentages your shop allocates. The numbers reveal a staggering truth: your current allocations won’t give you enough money to make payroll or settle an upcoming bill!
These examples of being “short” are common but avoidable. In this scenario, Cotton recommends adjusting your allocation percentages. If that doesn’t work, your shop likely requires changes on a larger scale.
But remember, you only have 100% to work with for allocations. “If you need 2% more in payroll, that has to come from somewhere else or you have to increase sales. I always say to run your business by the numbers, not emotion,” says Cotton.
You could come up short in this allocation exercise for many reasons. For two categories, parts and labor, Cotton provided examples of potential root causes.
Potential reasons for labor shorts include:
- Wrong pay plan
- Lack of productivity
- Not billing out time correctly
- Techs gave more time than you collect
Potential reasons for parts shorts include:
- Not following parts matrix
- Not getting credit for cores/returned parts
- Not holding SAs accountable for their job and setting clear expectations
Now to the positive. Let’s take a look at a more preferable experience reviewing allocations. You crunch the numbers and things look good! Your shop has plenty of profit left over.
Cotton describes this situation as a “windfall”. With a windfall, you now have extra money to get creative with.
As a shop owner, you may choose to pay debts with this extra funding. You can also pocket it as pure profit, or give your employees raises to keep everyone at the shop happy. The possibilities are endless and exciting!