If you’re planning on going away for vacation this year there’s a pretty good chance you’ll be boarding a plane to do it. Before boarding you’d correctly assume that your captain would check the paperwork to ensure that the plane was airworthy and that there is sufficient fuel on board for the trip including any contingencies that might be encountered including the weather enroute and at the destination. You make these assumptions because they are reasonable and by performing these tasks the likelihood of reaching your destination safely increases.
And yet shop owners who are acting as the captain of their own businesses routinely fail to perform the same type of due diligence for their business. By the time you read this it will be February or March and many shop owners won’t have created a budget. I was a shop owner for over twenty-six years, I get it. It’s easy to ignore finances when you're busy fixing cars, dealing with an ever-increasing number of crappy parts, employees, and customers issues. But failing to create a budget can lead to serious cash flow problems, missed opportunities, and in the worst case; bankruptcy.
If you want to get a grip on your shop’s finances and ensure you're not just wasting your time spinning your wheels here are the top 5 financial mistakes auto shop owners make every day and how to avoid them.
1. Not creating a budget and sticking to it
When I was a pilot I constantly cross referenced information to ensure that I was on the right course and we would arrive at our destination with the right amount of fuel. Many shop owners prefer to “fly blind”. They “manage their finances by checkbook”. They look at their checking account balance at the end of the month and if there is more at the end of the month than there was at the beginning, they figure all is good. This is dangerous. By not monitoring your cash flow you often lack the resources to handle unexpected emergencies.
Remedy
There’s a motivational poster I saw decades ago that read: “Successful people do that which they don’t want to do when they don’t want to do it”. Make creating a budget and tracking your expenses a priority. There’s ample software available to help you create a budget and it need not be expensive.
2. Failing to save for the unexpected
If you’ve been in this business for any length of time then you know that things can and do go sideways in a minute. Equipment breaks, the hot water heater dies, a parts problem hits at the worst time or there is an unexpected slow down and you find yourself pressed for cash, which can result in making poor decisions like borrowing money to meet your obligations.
Remedy
Force yourself to save for a rainy day in a separate bank account. Your target is three to six months of operating expenses.
3. Failing to save for taxes, especially sales tax
I’ve lost count of how many times I’ve heard of owners that have gotten in hot water with the IRS or their State because they didn’t pay their State Sales Tax, Payroll Taxes or their Federal Income Tax.
Remedy
Same as number 2: force yourself to deposit that money in a separate account.
4. Discounting without a plan
Discounting is a pretty contentious topic in our trade. I’m not going to discuss its appropriateness now, perhaps that’s a topic for a future column. I will, however say this; if properly planned and executed by those who are keenly aware of their numbers, discounting is an effective tool to increase revenue and profit. In my experience, however, discounting is frequently used by owners who haven’t a grasp of the cost of doing so and they hemorrhage money.
Remedy
Don’t employ discounts until you have a thorough understanding of your numbers and what you can afford.
5. Not understanding the Importance of Managing Cash Flow.
There’s an expression her in the South “It’s not what you make, it’s what you keep”. You can ruin a really great business by not monitoring your cash flow. If you consistently have “too much month at the end of the money”, you’ll eventually kill your business.
Remedy
Keep track of your expenses and don’t let your clients get into arrears. Monitor your receivables weekly.
Discipline is a key to your business’s long-term financial success. Creating a budget and understanding cash flow will help ensure you reach your financial destination.
