In my role as a consultant, one of the first things I do when I start working with a shop or MSO is look at their profit-and-loss statements. The old adage of “if you don’t measure it, you can’t manage it,” makes an accurate and detailed profit-and-loss statement the first step to business improvement.
I sometimes find myself butting heads with the bookkeeper or CPA at these businesses because all too often I find the chart of accounts that makes up the profit-and-loss statement is far too limited. They often consist of just a few general categories, whereas I want the businesses I work with to have real in-depth chart of accounts.
Don’t just lump in all “labor sales” into one line on the profit-and-loss statement, for example. Set up sub-accounts under “labor” to break it down by “body labor,” “paint labor,” “mechanical labor” and “frame labor.” (Most recently some shops are adding a sub-account for “aluminum labor.”)
Here’s why: The fundamental purpose of a profit-and-loss or income statement is to see where you are making money and where you are losing money. But there’s also another question that profit-and-loss statement should be answering: Where are you not maximizing profits?
So think about “parts” on your profit-and-loss statement. Is it broken down by sub-accounts for “OEM,” “aftermarket,” “salvage,” etc.? One MSO I worked with wasn’t doing that. The owner knew he was making xx percent on parts overall, and we both agreed he could improve that. But since he didn’t know what the actual profit was on each type of parts, he didn’t know where he was already hitting the higher percentage we were shooting for, and which type of parts were holding him back from maximizing his profit levels. He needed to break that down so he could monitor it and try to improve it.
That’s how breaking out the detail helps you trouble-shoot your profit-and-loss statement to see where you can improve. You can download a free “sample profit-and-loss ” under the “forms-tools-links” section of my website (www.CollisionAdvice.com) to get an idea of the type of chart of accounts I recommend.
Another key step in the process after you’ve created the detailed chart of accounts and sub-accounts in your accounting system is mirroring and mapping it in your management system so the data flows seamlessly from one to the other.
Another area where I see room for improvement in a lot of MSOs’ profit-and-loss statements is a lack of detail below the gross profit line. I like to break expenses out between “fixed expenses” and “semi-fixed expenses.” “Fixed expenses” are those that don’t change month-to-month, things like your estimating system fees, the lease of a copier, your security system fee, etc. The rest are “semi-fixed,” because they tend to vary month to month; payroll taxes, for example, vary based on sales volume.
Here’s where breaking this out can help you, particularly as you look to build up sales or acquire new locations. That process requires building pro formas or budgets or sales projections. Knowing exactly what expenses aren't unlikely to change with added growth can help you plan and project what the additional business or new locations might add to your bottom line.
An accurate profit-and-loss statement with a detailed chart of accounts also makes it easy to build a budget for the next year, something I encourage all my clients to do every October. You can then compare your performance every month to that budget, and make adjustments based on your actual numbers compare to your projections.
