Auto-Related Repair And Maintenance - Five Best Finance And Accounting Tactics.

Accounting and Financial Methods and Suggestions for Automotive Repair and Auto-Related Small Business

For automotive repair and automotive-related small businesses, here are five accounting and financial methods, suggestions and tactics that are both helpful and relevant toward improving your success.

Auto-Related Repair and Maintenance Shops – 5 Best Finance and Accounting Methods with Detailed Explanations  Jobs

1. Accrual Accounting Method

Why This Matters

First off, in general, businesses that carry inventory, are required to use an Accrual basis (not Cash basis) method of accounting under IRS guidelines. Under an Accrual basis method, a business recognizes income (when it is earned) and expenses (when they are incurred). For example, income is recognized when the business completes the job or task and submits an invoice. For expenses, purchases from a vendor (on account) are recorded as both an expense and a liability (typically, as a bill) to pay the obligation in the future. This transaction, a debit to an expense and a credit to a liability (purchases on account), done typically at the end of a reporting period, is the accrual entry.

Accruals provide a more accurate picture of a business’s income, expenses and liabilities at a point in time. Cash basis reporting records transactions (only) when cash is received or spent. Recognizing taxable income in advance of receiving payment under an Accrual basis is usually not a problem, since most auto-related repair and maintenance shops are point of sale businesses – they receive payment before the client or customer takes back possession of their vehicle.

In effect, transactions are “pulled ahead” in Accrual basis accounting, which gives the reader (creditor, debtor, would-be partner or shareholder) a better, more informed picture of both performance (Profit & Loss) and strength (Balance Sheet) of the business. In addition, Accrual basis accounting also does a better job at matching expenses against the production of income that yields a more realistic portrait of business performance.

2. Job Costing System

Why This Matters

Job costing systems allow businesses to (more accurately) collect all costs required to complete jobs such as labor, materials or parts and overhead/indirect costs associated with each job. It forces businesses to think about all the activities (not just direct labor and materials) that are necessary to complete each job. Activities that generate expenses that are often (overlooked) like indirect and overhead costs should be included to give a truer picture as to the overall cost to deliver these services. Here are two solutions providers offering job costing systems – Service Works All-In-One Scalable Platform, and Auto Leap-The Number One Mechanic Shop Software.

Having a system ensures that those activities that generate costs are collected and included to give a more accurate measure of profitability of each job. Specifically, for auto-related repair and maintenance shops, profitability for similar (or identical) jobs can be analyzed over time by randomly selecting jobs to highlight efficiency problems or pricing issues.  Used in tandem with processes that set standards for jobs, these standards allow shops to better plan and prioritize jobs based on time, resources required and budgeted return – gross profit per job (see 5. Profit Margin Analysis, below). My article – The Benefits of Setting Standards for Business Performance.

3. Budgeting and Forecasting

Why This Matters

Budgets and forecasts enable businesses to effectively plan. Financial goals are set, resources are identified and obtained to meet these targets, and results (against these plans) are monitored for corrective action. Income and expenses are budgeted for operating performance for a specific period, while long-term goals require capital budgeting – to expand (to additional locations) or into other services. Net Present Value (NPV) or Internal Rates of Return (IRR) are often measures that quantify and provide a “go/no-go” hurdle rate to determine if these projects should be undertaken.

Forecasts are forward-looking plans. They attempt to predict future business activity through historical data and current economic trends using mathematical models (like regression equations or more sophisticated AI tools). In addition, seasonality is an important component for many businesses in predicting future activity.

4. Inventory Management Systems

Why This Matters 

Inventory management (and control) is important. Good management enhances customer satisfaction (minimizing the risk of stock-outs), reduces carrying costs and provides a check on the calculation of cost of goods sold.

A lot of decisions to be made here. Perpetual vs. periodic system? A perpetual system tracks inventory changes in real time so it’s very accurate in minimizing the risk of stock-outs. Periodic systems are adjusted/updated (typically) at month end and rely on manual counts (or at the very least, partial counts). Perpetual systems are more expensive but more accurate.

Cost flow assumptions. You may have heard of FIFO, LIFO or Average Cost relative to inventory. What do these terms mean?

FIFO: First-In-First-Out. In periods of inflation (very relevant for today), the least expensive inventory (stocked earlier) are used first as cost of goods sold leaving higher cost inventory (that was stocked later) on the books.

LIFO: Last-in-First-Out. Higher cost inventory (inventory that was purchased most recently, and the most costly in periods of inflation) is used as cost of goods sold leaving less costly inventory (as an inventory asset) on the books. Inventory is classified in LIFO layers.

Average Cost. New inventory cost is averaged across all existing units to create an average cost. This method ensures that the cost per unit for cost of goods sold and inventory assets is the same. For LIFO and FIFO, the cost per unit between cost of goods sold and inventory is (very often) different.

Ok. So What’s the Goal Here?

In periods of high inflation (like, right now), a LIFO method might be preferable as it maximizes cost of goods sold and minimizes taxable income.  You’re not specifically selecting inventory assets (to use as cost of goods sold) rather the parts or units chosen are part of a (FIFO or LIFO) layer that has a specific cost assigned to it.

What Else?

The idea here is to choose a software solution that 1. integrates well with your accounting platform, and 2. optimizes inventory levels by minimizing the risk of both stock-outs and keeping a quantity on-hand that reduces inventory carrying costs (facility costs, and insurance). In addition, an optimal level of inventory avoids tying up too much capital in unnecessary amounts of inventory and helps avoid possible obsolescence.

5. Profit Margin Analysis

Why This Matters 

Assessing profit margins is essential to identify which products and services are more profitable (that should be emphasized) versus those that are barely profitable or unprofitable, and thus, de-emphasized. The key here is to identify which jobs or services are returning more gross profit – the difference between net receipts (after discounts or credits) and direct expenses – labor, and direct materials.

I would also include the amount of time required to earn gross profit. Time is a finite resource, so jobs that are twice as profitable but require 3X the amount of time to earn than other jobs, should be factored in. For example (simple) 1 job that returns $1,000 in gross profit requiring 9 hours = $111 gross profit per hour. However, a job that returns $500 (half the larger job) requiring only 3 hours = $167 per hour. If you had two (or more) smaller jobs that could fill the remaining 6 hours of time that averaged greater than $111 in gross profit over this nine hour period, you would choose the smaller jobs.

Of course, you can’t manage your business on a profit per hour basis. The point I’m making is that having job standards that quantify the amount of time required for brake repairs, engine rebuilds, chassis or transmission work, for specific makes and models allows you to make decisions on which jobs to target. Here is just one resource from Mitchell 1 Pro Demand that publishes labor times and a parts estimating guide.

Additionally, in periods where there is an overabundance of jobs (which may or may not be relevant) every job that is accepted has an opportunity cost associated with those jobs that did not get chosen. So, the opportunity cost of choosing the larger job (previous example) is: $167/hour – $111/hour = $56/hour. If two additional smaller jobs (that are available) get pushed aside in favor of this larger job, that return $89/hr. and $126/hr. in gross profit, it would cost this shop: ($56/hr. x 3) – ($22/hr. x 3) + ($36/hr. x 3) or $210 in lost profit over 9 hours.

I’m not publishing examples to impress anyone. I’m all about helping businesses create a mindset to identify the most profitable products and services within the capabilities and scope of their shop/business and executing on that strategy.

Moreover, Customer segments – like individual customers, small business clients and large business clients should be routinely analyzed to determine which of these segments are returning more gross profit over time. Suppliers and vendors should also be analyzed as part of this to understand if improvements can be made in quality or cost. Again, the idea here is to identify high margin products and services and to focus those resources on activities that yield the biggest “bang” for the buck and sweat equity.

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Wrap-Up

Create a Competitive Advantage

Every business encounters obstacles in their evolution. Implementing sound financial and accounting (F & A) practices and processes early, moves F & A from the “one more thing to tackle” category toward both a strategic and tactical asset and advantage. This mindset separates those businesses “that do” from those that should. These are just five suggestions and methods – but, there are many more geared toward those businesses needing specific solutions. Regardless, implementing these accounting and financial methods and suggestions is a great start.

The Benefits Of Setting Standards For Business Performance
Effective Cash Management Techniques For Small Business
Financial Concepts And Your Small Business
Why Accuracy Matters In Accounting & Bookkeeping