Know financing options, HOW TO MANAGE YOUR CASH

Everything you sell has a direct cost. You cannot sell an hour of painting labor without paying the painter and buying the paint. And it is only what is left over after that you can pay your overhead, service your debt and grow your business. The gross profit from everything you sell should be consistent. This consistent gross profit should be reflected on your monthly profit and loss (P&L) statement as the gross profit percentage.

Daily overhead and debt-service burden is the next number you should know. To get this number pull out your last P&L statement, look at your total overhead number in the year-to-date column and divide this number by the number of months contained in this number. If the overhead section of your P&L includes depreciation, amortization and interest expense, you should back these out of the total before dividing by the number of months. If these three numbers are included in your overhead on the P&L, tell your CPA to move them.

Next, add up all of your loan payments and add this amount to your average monthly overhead. Finally, divide this combined total by the average number of days your business is open in any given month. The result is how much gross profit your business needs to generate to break-even.

Lead cost per $1,000 of sales. If you know this number you are in the top 1 percent of business owners in the United States. Lead costs are advertising expenses directly related to sales. For example, lets say you run an ad in the paper that costs you $500 and it generates $10,000 in sales. Your lead cost per $1,000 of sales is $50 ($10,000/$1,000 = 10, $500/10 = $50). Of course, some ads will perform better than this and some will perform worse. Over time an average will develop. Knowing this average lead cost amount will tell you how much you have to spend to achieve whatever level of sales you desire.

Pay close attention to these statistics:

• Nine out of 10 small businesses do no advertising. They rely on their location and hope that they will gain customers from the traffic passing by. This is an acceptable strategy if you own a 7 Eleven, but a ridiculous one if you own an auto body repair shop.
• Of the one out of 10 small businesses that spend money on advertising, only 1 out of every 100 bother to keep track of where their sales come from so they can calculate its effectiveness.

Compare your body shop to the bigger, more successful body shops in your town. Chances are, they spend more on advertising than you do.

Expansion cost break-even point

Let's say that your expansion will cost $500,000 and the monthly loan payment on the debt is $6,000. With a 30 percent gross profit margin you will need to increase your monthly sales $20,000 per month ($6,000/30 percent). And, if you know how much your lead cost per $1,000 of sales is you can calculate how much you have to spend in advertising to achieve this growth in sales.

Other considerations with the expansion are the opportunity to gain efficiencies and bring in tasks that were previously getting farmed out. Both of these should show up in an increased gross profit margin. So if your shop is doing $1,000,000 a year in sales and you can increase your gross profit margin by 2 percent then $20,000 more is hitting your bottom line. And as your business grows the 2 percent grows with you.

Needs, goals and a plan

The idea to expand your shop has likely come about to fulfill a need. The needs we often hear about are:

• Outgrew current facility;
• Offering service to a new market; and
• Improve or add a customer reception area.

Ideas that may warrant consideration are:

• Bring in-house outsourced services;
• Offer additional services; and
• Improve efficiencies.

Ideas that should not be considered are:

• If I build a bigger shop I will get more customers; and
• Competitors have built a bigger shop.

As you identify your needs to expand your shop, it may be wise to consider some of them to improve the results of your expansion. Working from the list above, here are some added thoughts that could help you merge various needs:

Outgrown facility. This is the best need of all. It is a great problem to have. By expanding your shop, how many more vehicles will you be able to handle at one time? Can you improve your turnaround time?

Service new markets. Are there other markets you could be pursuing? Can you take on semi tractors? Can you take on refurbishing semi trailers? Can you become the king of eliminating rust?

Improve or add a customer reception area. This deserves a lot of consideration. Many shops have either no reception area or a dirty one. Often times there is not even a place to sit. Whether you want to admit it or not, customers want:

• To deal with successful businesses. Having a clean, well-designed reception area screams successful.
• To feel respected. Having a clean reception area with chairs tells them that you respect them.
• To feel welcome. Having a clean reception area with chairs and free beverages will help make your customers feel welcome.

Bring outsourced services in-house. Hopefully, in your accounting process you are tracking each of the services you currently outsource. Here are a few things to look at when considering whether or not to bring them in-house:

• How much money are you spending annually on each service?
• How much would it cost to perform it in-house?
• Would bringing the service in-house improve efficiencies or disrupt already successful processes?
• Are you having any trouble finding reliable service providers?
• Are your current service providers helping or hindering your ability to meet promised delivery dates?

Offering additional services. While offering additional services can be a distraction, they also can be huge cash flow generators, can improve customer loyalty, and provide more marketing opportunities for your body shop. Think about these services:

• Could your business do total auto body care?
• If you had a car wash that is used on a regular basis, how much more likely are those customers to come to you if they needed work done on their car after an accident?
• If you had a detail center that is used on a regular basis, how much more likely are those customers to come to you if they needed work done on their car after an accident?
• If you take great care of the customers that use your body shop and let them know how much you care about the long-term care of their car, how much more likely are they to use your car wash and detail center?
• The more services you deliver to a customer, the more likely they are to stay your customer.

Improve efficiencies. Look at your processes when planning an expansion and take every opportunity to improve efficiencies wherever possible. Improved efficiencies mean greater gross profit margins, greater employee retention and ultimately greater customer satisfaction.

A bigger shop means more customers. Just because you build an expansion doesn't mean customers will come. This is where marketing comes in. Customers like to deal with successful businesses. When people see a business expanding its operations, they assume that you are successful. The trick is, you need to tell them. Do some press releases, have an open house and do some cross marketing with other businesses. Invite the media to see the construction and interview you about the new jobs you are creating. There are many ways to let your community know what is going on and it's your job to do this.

My competitors have added on. Don't try to keep up with the Joneses when it comes to business. You are in business to make money while you own it and sell it for a profit. Adding on just because a competitor did makes no sense.

Goals and a plan

Having written goals and a plan is the best way to get what you want. You are more likely to achieve written goals. Write them down, look at them daily and track your progress toward their achievement.

The plan contains the steps you will follow to achieve your goals. Before you try to borrow hundreds of thousands of dollars, take an afternoon off away from your business, and write out your goals and how you plan to achieve them. Your banker is more likely to help you if you have a written plan.

Once you have a written plan, set aside a few hours every week to work on your business. Do this someplace where you won't be interrupted. During this time you can review and update your plan and work on marketing. The key is to do this on a consistent basis. Office supply stores sell a variety of programs that can help you write your plan.

Going to the bank

Now that you have your plan and you've decided what will be included in your desired expansion, it's time to go to the bank. Your first inclination will be to go to the bank where you have your checking account and any other business loans, and that's a good idea. But don't stop there. Go to several banks because banks don't reward loyalty. While you should have a relationship with your banker, more often than not your future is not within his or her control. Your banker has committees to present to and supervisors who don't know you.

Here are advantages of going to several banks:

1. Approval at one bank can increase the odds of getting approval at another.

2. Approval at one bank can force the others to compete to get or keep your business by offering lower interest rates, reduced closing costs or more favorable repayment terms.

3. It lets each of them know you are serious about this project and that you are going to get it done, even if your current bank decides not to back you.

Once you have approval from one or more banks, consider each offer carefully. Compare the interest rates, the repayment terms and the closing costs. Total up what each proposal will cost you by the time it is completely repaid. Consider what each one demands or is asking for collateral and security.

If the bank wants to tie up your accounts receivables (AR) to secure the loan, say no. Tell them to add a line of credit to the deal that is tied to the AR. Most banks will not redo the deal later, and a growing business means growing AR and a strain on your cash flow. You have to be able to handle this growth and a line of credit on your AR will help you do this. However, if you do not currently have a line of credit and you let the bank tie up your AR, you probably will not be able to change it later.

Most banks will ask you to sign a personal guarantee. Occasionally the bank also asks the spouse to sign a personal guarantee. If your spouse is not a part owner in the business, tell them no.

If you have to put up your home and personal assets as collateral, make sure you get a set of written circumstances telling you when they will release these assets. Since the use of personal assets is related to the bank loaning you most or all of the money needed, they should be able to commit to a release time.

For example, if the bank says that with 25 percent down your personal assets will not be needed, it only stands to reason that once you have 25 percent equity in your project they should release your personal assets. Do not expect the bank to offer this. From their perspective, the more collateral they have the better. This fact does not change regardless of how much equity you have.

You have to demand that this be written into the loan. Do not accept verbal assurances from loan officers that they will do this for you when the time comes. Odds are the loan officer will be gone before you get to this point and verbal agreements are not enforceable. In the event that you cannot get the deal done without the use of your personal assets and there are no written terms as to when they will be released, plan on refinancing the loan in a few years. As crazy as it sounds, the attitude of the bank is that it would rather lose your business in a few years than release some of the collateral.

Working with debt

Having no debt in your business is a favorable position to be in, but it's not realistic if you want to grow your business. You need to know how to work with the debt. You have to make your payments and if you know your numbers and are working your plan this should be no problem. So what do you do if you are struggling to make your payments?

It is better to make a partial payment than no payment. It is your job to get sales up so go to work on your marketing and make the deals necessary to bring in the money. Cutting out the expense of advertising to make your payments can be the kiss of death for a business, unless your advertising is com-pletely ineffective. If that's the case you need to fix it. Look at your overhead and your personal spending to eliminate what you can to get your payments made while you work on getting your sales up.

If you are not having trouble making your payments, consider making extra payments to get the debt paid off quicker. As long as you have cash reserves, get out of debt as fast a possible. Accelerating your payments can save you tens of thousands of dollars of interest expense. In fact, making just one extra payment in the first year on a real estate loan for your expansion will save you four future payments. Making an extra payment on the equipment loan will save you nearly two future payments.

But you need to build up your cash balance before making extra payments. If you are making extra payments without having any cash reserves you will be in trouble if there is ever a downturn in your business. Banks do not give extra payments back and they do not loan money to businesses in trouble. Protect the future of your business by building up your cash reserves before accelerating any debt payments.

Working with lines of credit

The purpose of a line of credit is to level out the cash flow of your business and help you meet your cash demands while you are waiting for your receivables to come in. It is not for buying cars, expensive toys or other large purchases.

It is meant to be borrowed against and paid back within a very short period of time. Lines of credit are not permanent working capital loans. So if your AR is $50,000 and because of your growth it has mushroomed to $100,000 and you borrow $25,000 from your line to pay your bills, you need to pay the line back when the receivables come in.

Go conquer your market

You now have all the tools necessary to plan your expansion and the future of your business.

Most business owners spend more time planning their vacations than they do planning the future of their businesses. This is a major contributing factor to why 80 percent of all businesses fail in their first five years, and 80 percent of the ones that survived will fail in the second five years.

Refuse to be one of those owners and you will succeed and be in possession of a business that will get top dollar when you are ready to sell.