By this point in the year, you’ve likely had a chance to see if your pre-tax preparation process has served you well. As you review the profits and losses in your income statements, how do you feel about your financial landscape?
If the answer is “Not so good,” you may need to make some changes to improve your outlook for the coming years. Remember that if you keep doing things the same way, you will get the same results every time.
Thankfully, you can improve things dramatically by optimizing your profit and loss tracking procedures and focusing on productivity to get your numbers in order. Here’s how to make that happen.
Why Focus on Cash Flow Management
Accurate income statements, or profit and loss statements, are a great tool to have on your side. On one hand, they’re a roadmap of where you’ve been, giving you the data needed to push your auto repair shop to the next level. On the other, they’re vital in determining your business valuation if you ever decide to sell your company in the future.
Far too often, auto shop owners muddy the waters by routing all their major purchases through the business. Race car parts, travel expenses, and even putting their kids on the payroll are all common add-backs used to lower the tax bill. Unfortunately, doing that reduces your business valuation and potentially results in IRS audits and penalties.
So, keep things clean by separating your business and personal expenses. And always keep good books that accurately reflect your business profits and losses to stay in complete control of your finances.
How to Create Accurate Income Statements
Clean, concise income statements start with an easy-to-use accounting software program. Many auto repair shop owners use QuickBooks, but FreshBooks is another great option. Whatever you choose, aim to set it up right from the start and then get in there on a set schedule to monitor your data.
Set Profit and Loss Categories
When it comes to your income statements, less is more. You must input accurate information under the key metrics without adding any fluff. That way, you can use the data to make critical business decisions, and your tax accountant won’t have to dig for each set of numbers.
When setting up your profit and loss statements, your three main categories are:
Sales
Under the ‘Sales’ category, you will put all the items you sell through your shop, including parts, labor, shop supplies, and sublet jobs. Don’t split your parts into separate categories. If you want to see that data, look in your shop management software system.
Tires are the only exception to that rule. If you split up tires into their own category, make sure that you get them from a dedicated supplier. Otherwise, you will need to split the cost of the tires from your other parts, which can prove quite messy.
Cost of Goods Sold
Your ‘Cost of Goods Sold’ are all the items you paid for to make your sales. Every line item in this category must directly relate to sales. So, you will account for the cost of parts, labor, shop supplies, sublet jobs, and tires if listed separately.
Fixed Expenses
Your ‘Fixed Expenses’ are all your general operating expenses, including:
- Rent
- Insurance
- Advertising
- Utilities
- Office staff wages
- Maintenance expenses
- Professional fees
If you pay for it, but it doesn’t have a one-to-one relationship with a category in sales, put the line item in fixed expenses.
Quick note: When using QuickBooks, you’ll also see ‘Other Income’ and ‘Other Expenses’ categories. You will want to use ‘Other Income’ for things you earn money doing but don’t directly relate to your services, like storage fees and scrap sales. In ‘Other Expenses,’ add items like depreciation and amortization.
Track Sales and Expenses
When set up correctly, your accounting software program should link to your sales system and bank account to automatically track your sales and expenses. Although convenient, technology is never perfect, so check in on a regular schedule to verify that all your data is correct and up to date.
Remember to keep your eye on the big picture whenever you make changes. Only add expenses under the main categories to keep your profit and loss statements clean and concise. If you want to break things down further, use sub-categories to build separate line items.
What You Need to Know About Deductions
Deductions reduce your tax obligations, helping you keep more money in your hands each year. However, you can only deduct purchases used for your business, and they must pass the IRS’s fair and reasonable usage rules.
An excellent accountant will tell you if an item falls into a gray area and if you have a good argument on why it’s a business deduction. With that information, you can decide if you’re comfortable claiming the item or would rather not.
As far as how deductions go, all the items on your profit and loss statements are deducted the same, except meals. Business meals, like for shareholder meetings, get deducted at 50%, while food bought for onsite meetings or training sessions are 100%.
Worried About Finances? Look to Productivity for the Answer
If you’re looking over your income statements and feeling worried about your earnings, it’s time to make a change. Skip the urge to try to cut overhead and just focus on productivity instead. Oftentimes, you’re missing the mark in either supply or production.
Start by looking at supply to confirm that you sell parts and labor at the proper margins and volume. You likely have a production issue if your profit margins and sales volume are at the right level. If not, bump up your advertising spending to correct your course.
When it comes to production, honestly assess your employees’ ability to get cars out the door. Look at their productivity numbers, too. Do you have three techs doing the job of two? If so, you may need to fire the tech who cannot quickly yet thoroughly complete the assignments at hand.
Pro Tip: Don’t let your average repair order, or ARO, figures dip while making productivity changes. Regularly audit your repair orders to keep things running smoothly.
Boost Your Business Success with Auto Shop Coaching
As you evaluate your profit and loss statements, keep in mind that you don’t know what you don’t know. Sometimes, the most confident auto repair shop owners are the ones who are in dire need of help with their bookkeeping practices.
Fortunately, you can easily ensure you’re on the right track by partnering with Chris Cotton at AutoFix Auto Shop Coaching. We’re here to help you assess your income statements and improve your shop with proven tactics, like using our Profits and Cash Flow System.
To learn more about cash flow management, schedule a call with Chris by calling (940) 400-1008. If you don’t have time to make the call right away, just fill out our online form to request a callback, and we’ll get in touch with you as soon as possible.
