I recently did a webinar covering the basics of why shop owners should look at their Profit and Loss (P&L) statement and how to set it up properly so it can be used as a tool for the business. The whole premise of the webinar was to address the common mistakes business owners make that affect their ability to understand their P&L. There are plenty of ways to cost yourself money, but here are the most common issues I see with new clients.

1. Your P&L is inaccurate or set up incorrectly.

The most common reason business owners do not understand their numbers is because their numbers do not make any sense. I always talk about working with your numbers, and at some point it will start to click. Instead of inventory and cost of goods sold, you’ll begin to see the physical parts moving through the shop and how that relates to your profits. However, if your financials are inaccurate, how could your numbers ever make sense? Furthermore, I see plenty of shop owners with accurate financials that are not set up correctly, leading to the same confusion. Your P&L is the most powerful tool you have as a shop owner, but if it’s inaccurate or unorganized, it’s not worth the paper it’s written on.

2. Your P&L is too detailed.

A lot of business owners read the first mistake and then swing to mistake number two. While having a P&L that is inaccurate or unorganized doesn’t help your business, going the other direction and filling your P&L with endless lines of detail can lead to the same end result: confusion. Remember, a P&L is a tool to show you what happened in the past and what changes you should make to get a different result. The major details of your business should fit on one or two pages at most. If your P&L is three or four pages long, there is simply too much data to see trends, spot issues, or find something that has been miscategorized. It’s like finding a needle in a massive haystack. Instead, combine sub-account categories into broader categories. For example, instead of listing all the utilities separately, group them together. Think to yourself, ‘If I saw this expense or income separately, would I change my decision?’ More data doesn’t always mean more answers.

3. You are measuring sales just to measure sales.

These mistakes seem to be connected in a lot of ways, and this one is no different. Just like many shop owners go into too much detail on their expenses, they do the same in their sales category. The reason we split sales out on our financials, as well as in our shop management system, is to confirm cash and margins. If we just listed deposits as sales, we wouldn’t see if cash wasn’t making it to the bank. If we didn’t separate parts sales from labor or sublet sales, we couldn’t analyze margins to ensure we are making what we think we are on parts. However, once we go beyond this, we start losing information, not gaining it. One of the most common sales categories to separate is tire sales. The reason most shops do this is because tires have significantly different desired margins. If you sell only a couple of tires, it’s probably not material. But if 20% of your sales are tires, you’d be hard-pressed to measure your parts margin without separating them. The issue arises when tracking the cost. It’s easy to separate the sale, but if you don’t track the cost separately, you’ve now lost all detail. Tire sales without any cost create an artificially high margin, which leaves our parts margin understated; we just don’t know by how much. If you’re trying to achieve a different margin, then splitting the sales makes sense, but only if you can and will track the costs as well.

4. You have multiple businesses in one.

I had a client with a diesel shop that also had a towing and transport business. The shop never paid for any tows, the trucks never had to pay retail for repairs, and even the customers were confused about who to pay. One of the main reasons the business owner hired my company was to help him get his financials set up correctly so he could see how to improve his repair shop. He knew he was making money on the trucks but wasn’t sure how to fix the shop without good data. What we found was that his gut was 100% wrong. Since nothing was done at full retail or properly tracked, the costs of running the transport division were being subsidized by the repair shop. Once the books were set up correctly, it became clear that the trucks weren’t even covering their costs. Maybe you sell used cars. Maybe you have other ancillary businesses running inside your shop. Those can also be skewing your numbers.

5. You are messing up your P&L.

I probably should have put this first, but then you would have stopped reading the article. People do not like taking the blame, but shop owners are often their own worst enemies when it comes to their financials. While tracking sales and ensuring cash makes it into the bank account is one way to ensure the team isn’t stealing money, it’s also the first sign when an owner is doing the same thing. One reason we track parts margins is to make sure we aren’t overpaying for parts. But what happens when the owner doesn’t create a ticket for their own truck or family vehicles? There are plenty of ways to leverage the benefits of being self-employed, but are those same “write-offs” adding unnecessary variables to your processes and financials instead?

At the end of the day, there is always something more to learn about your financials, your business, and the ways you can improve. Avoiding these mistakes doesn’t guarantee success but making the same mistakes others have can almost guarantee your disdain for everything financial.

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About the Author Hunt Demarest, CPA/ABV, is the owner of Paar, Melis & Associates and specializes in accounting and financial strategy for auto repair shops nationwide. He also hosts the Business by the Numbers podcast, where thousands of shop owners tune in each week to better understand their numbers and grow more profitable businesses. A published author, Hunt has written a series of books for shop owners, most recently Beyond the Bays.