Gwyn Johnson knows how the books can take a toll on shop owners. “They get beat up all day long, sometimes by customers. They get beat up by employees,” Johnson says.
“Then they’ve got all that on top of just dealing with the day-to-day of running a small business, and it’s overwhelming when they’re trying to do it all.”
With 22 years of professional accounting experience, the last seven of which were spent in the auto care industry, Johnson has seen it all and is here to help.
From the owner who guesses he has $60,000 worth of inventory but actually has $30,000 to the rural Tennessee owner who found out everyone in his shop was making money except for him, she has made it her mission to help shops get their spreadsheets in order.
Currently an accounting expert for autoshopanswers.com, a leading industry consulting company, she sat down with R+W to discuss some simple accounting strategies for shop owners.
How do the majority of new shop owners you meet approach accounting practices?
They know they need to have things in place. They just don’t know how to go about putting those things in place.
Most of the time these guys are just so overwhelmed with running their business that this kind of falls on the back burner. Because they know that, especially if they are actually turning wrenches, this is not going to be a priority. Their priority is working on cars.
But the majority of guys that I’ve met that have just gotten into the business, they’re not exactly sure what procedures and things they need to be doing.
Once you kind of walk them through some of the daily things, it starts painting a bigger picture for them: “OK, this is what you’re going to be doing weekly,” and “now this is what you’re going to be looking at monthly,” and really giving them a guide for making them understand how much control they have over the profitability of their shop at the daily level, and how that’s overall affecting them at a monthly level.
When should a shop owner seek professional help?
If they have an accountant, CPA or bookkeeper, or someone that hands them a P&L, and they look at it, and it doesn’t mean anything to them—that is when they should seek help. If you understand your P&L, it’s kind of like looking at an X-Ray for a doctor. You should be able to look at it and say, “Hey I’ve got a problem here,” or, “What’s going on here?”
What strategies do you emphasize?
One of the things that I have to stress to people is that no matter how large or small their shop volume is, they need to have in place a daily set of accounting procedures. Whether it happens at the end of the day when their shop closes, or whether it happens the next morning before they open, they need to have in place a daily set of procedures that happen.
I look at it like every day is a unique P&L. All the repair orders that closed that day: How well did you do with your parts markup margins? How well did you do with your labor markup margins? If you not only have flat-rate technicians, but if you have hourly employees as well, how well did you do managing their time? How about your gross profit? What did you make percentage-wise for that day’s business? And what did you actually take in as profit, dollar-wise?
And then it’s an accumulation as the month goes by. You can start tracking what your gross profit is month to date. And you should always know, as a shop owner, what your overhead is.
There should be a day in the month when you know basically that you have broken even.
And that date might be the 15th of the month. It might be the 20th of the month. It might be the 25th of the month. Whatever that day is, you have broken even. You have made enough gross profit that you have paid all your bills.
From that day forward, for the rest of the month, that is nothing but profit in your pocket.
What is the single most important number for determining the financial health of the shop?
Gross profit—60 percent. That’s the magic number over the past seven years. A shop can get by with 50 percent. Most of the time those guys are just getting by. Less than 50 percent, they’re usually not making it.
If you were to look at your total overall sales for parts and labor, your cost of sales would be no more than 40 percent to get to a gross profit of 60 percent.
There are formulas we have in place as far as labor markup and parts markup. We know if we look at a shop’s parts markup, if they’re not marking their parts up, which a lot of the new guys won’t, it severely affects their gross profitability, because you can’t make it all in labor. You can’t hit that 60 percent in labor.
Then under that you have all of your overhead expenses, such as your rent, utilities, insurance—all of those things you’ve got to have in place to keep your shop open.
It’s one day at a time. Then we’re building a month at a time, and then that turns into a year. If their net profit is 10 percent, which is a healthy profit, versus a year of no profits, or a year of going in the other direction, net losses.
What accounting software do you recommend for shops?
I’m a huge proponent of QuickBooks. It is easy to use.
Some of the shop software now integrates with QuickBooks, so it saves a lot of data entry. I’ve used it for years. For what you’re going to pay for software, it’s the most bang for your buck.
Most of the time, whatever shop software they’re using—you know the saying, garbage in, garbage out? The information that’s coming out of that shop as far as profitability is only as good as the information that’s going into it to track the profitability.
The best end-of-the-day procedure is to double check all of the parts invoices for that day’s business, and to double check that the information put into the system for cost is accurate.
It should down to the point where, though not impossible, it’s really hard for anyone to unintentionally make a mistake or intentionally make a mistake that you don’t know about.
Double check, and do it every day.