Did you know that 20% of new businesses tend to fail in the first two years of operation?
The same rule applies to auto repair shops. After all, there’s a lot that goes into starting an auto repair shop. While the ‘to-do list’ may seem endless, it’s important to remember to budget for regular expenditures and to properly learn how to manage finances.
Many new businesses fail due to a lack of business planning and appropriate budgeting, which is a sad fact. Monthly car repair shop costs must be properly monitored and predicted to prevent defeat.
Keep on reading for our full breakdown of how to tailor financial management for your auto repair shop.
How to Manage Finances 101: Understanding Cash Flow
Your cash flow is just the difference between your current assets and current liabilities. Items like cash on hand, accounts receivable (if you own them) and inventory are all examples of current assets. They also include any equipment or other assets you may have to help you run your company.
If you have any long-term obligations, they are often included in your liabilities. When calculating the total amount of company debt, be sure to include all types of loans and lines of credit.
As a general rule of thumb, cash flow problems occur when expenditures exceed revenue. Although it’s difficult to obtain a clearer view of your cash flow health, you may calculate your cash flow metric.
Your cash flow ratio is calculated by dividing the value of your current obligations by the value of your current assets.
How to Deal With Budget Challenges
Making ensuring you’re paid on time for your services is an important part of effectively managing your cash flow. This may be a difficult area to handle for car repair businesses.
Repairs are often covered by vehicle insurance, so you may have to wait until insurance reimburses you before you are paid.
Other options include allowing consumers to pay bigger amounts through invoicing or even providing financing options. All of these payment methods lengthen the time it takes to be paid once you’ve completed your job.
Plan ahead when it comes to your yearly budget by allowing extra time between when you perform a repair or service and when you get paid. You should also think about obtaining a revolving line of credit, which you may use to fill up any shortfalls in your cash flow.
Dealing With Upfront Business Costs
When you operate an auto repair company, handling the relatively high initial expenses of starting a business is another aspect that affects your cash flow.
Normally, you’ll compensate your trained technicians for finishing a task and ordering essential auto components well before the client pays for the service. This may result in cash flow gaps that need to be filled.
Make careful to account for these upfront expenditures while making your year-end budget. To assist save expenses, try purchasing frequently used replacement parts and other items in quantity at a discount and keeping them on hand for when you need them.
A short-term company loan may help you cover the initial cost of inventory, which you can subsequently repay when you receive payments from customers.
Managing Slow and Busy Periods
Auto repair companies, like many other businesses, have “busy” and “slow” seasons.
During the summer road trip season, you’ll most likely be extremely busy, while during the Christmas season, you may find it difficult to fill your store bays.
Of course, this can depend immensely on the region of the country your shop is located in. To deal with the highs and lows, you’ll need to prepare ahead to ensure you have enough technicians on staff and cash on hand.
If you’ve been in the company for a while, you may use the prior year’s performance to predict when you’ll need to have extra cash on hand to get through a sluggish month. If you’re a new company, conduct some research on industry patterns to determine when you should budget for sluggish months.
After you’ve identified your sluggish months, consider what additional services you can provide to keep revenue flowing during those times. Can you, for example, add oil changes, detailing, or state inspections to your list of services? You may also consider forming a partnership with auto insurance companies to establish yourself as a favored service provider.
Also, you’ll want to use auto repair shop accounting software if you don’t have an accountant on hand.
Managing Finances: Ways to Set Up Your Budget for Success
There are some categories that you’ll want to prepare before the start of your financial year.
Let’s take a look at them one at a time.
Companies often make the error of just accounting for salaries when planning for employee expenses, although wages account for a little over half of the overall compensation.
Employees in the automobile repair sector earn an average of $22.19 per hour. This figure does not include perks or a pension, which will increase your hourly wage by $19.55.
The average monthly rent for a car repair business may range from $1,500 to $15,000, depending on the size. Even if you own the property, you’ll have to pay for utilities and perhaps a mortgage.
Mortgage and rent should make up around 6.64 percent of your monthly car repair shop expenditures. To put it another way, you don’t want to be house poor.
Maintenance on a Regular Basis
Regular maintenance is another significant cost to consider. It may be as easy as repainting the walls or repairing a leaking roof.
As a general guideline, put aside 1% of your monthly rent or mortgage payment for upkeep. So, if your rent is $2000 per month, you’d set aside $200 for upkeep.
Ready to Manage Your Company Finances?
If you’re a new business owner or wanting to run your own auto shop in the near future, then you’ll want to learn about money management.
Hopefully, our guide has shed some light on how to manage finances for your auto repair shop. And, if you liked reading our article, then you’ll love checking out our additional tips and tricks. All of those (and much more) are available to you in our automotive and business sections.