In this part of the collision repair management series I would like to talk in depth about probably the most important aspect in every collision repair workshop, regardless of its size or location. In fact, I rephrased a little in the title of the article the old saying: “Cash is the King” to “Cash flow is the Emperor”, because in our age of plastic cards and checks, physical cash is rather associated with money laundering or tax evasion.
Through my career in sales for car refinishing industry, I have had an opportunity to meet a multitude of people of the trade. Owners and managers of bodyshops in different countries during our meetings usually prefer to talk about the number of parts painted, contracts with fleet management companies or agreements with insurers. Many of them can also easily jungle with productivity, profitability or materials consumption ratios, however very few can reply whether their cash flow is positive or negative. Big mistake! Even if a bodyshop is profitable, but with continuously negative cash flow (I will define the term below) any business can go bankrupt.
Fundamentals about cash flow
By definition, cash flow of a business is a net amount of cash or cash equivalents moving in and out the bank account. Positive cash flow occurs when during the given time period, cash inflows are higher than outflows. Likewise, if the amount of cash, which left a bodyshop’s account (let’s call it Etalon Body and Paint) are greater than cash inflows, then we have negative cash flow here.
Bodyshop’s Cash Flow Statement
Imagine that Etalon Body and Paint bodyshop’s manager; call him Alex (surprise) is doing his monthly Cash Flow Statement for August (I recommend actually to make CFS monthly). During the past month bodyshop issued invoices for 35.300€ (VAT excluded), received payments for 29.000 Euro from the invoices issued in June and July (Etalon is paid in average within 45 days from insurance companies and upon vehicle delivery from individual customers), paid on time salaries, suppliers, interests, taxes and all bills. Plus, performed an annual spraybooth maintenance.
(+) Gross income from operations: 35.300€
(-) Operational expenses (billed in August): 27.000€
Net income: 8.300€
Cash flow statement
(+) Cash receipts from customers: 29.000€
(-) Salaries: 9.500€
(-) Parts suppliers payments: 2.500€
(-) Paint related materials suppliers payments: 7.200€
(-) Rent: 1.000€
(-) Loan interest payment: 800€
(-) Other bills paid: 450€
(-) Tax paid: 2.800€
Net increase/decrease in cash for August: 4.750€
In general, Etalon Body and Paint had a good month, because it’s net income was 8.300€ and net cash increase of 4/750€. Note that Etalon’s management made good deals with its suppliers and spraybooth maintenance company by paying the accounts 60 days end of month, but can still work on better deal with insurance companies or/and increase the business with private customers.
Cash flow and net income
Do not confuse cash flow with net income. Net income includes accounts receivable, for example, invoices, which have not been settled by insurance companies yet, or, similarly, accounts payable – money to be paid to suppliers in the future. Both accounts receivable and accounts payable are sums, which have not changed hands yet, thus they are on the paper only. As you may have noticed from the above statement, the cash payments for Etalon Body and Paint in August do not match the actual operational expenses. In fact, cash flow statement in some way reflects the past expenditures rather than the current month’s situation. For example, spraybooth maintenance cost was not paid in August either, because it is due after 60 days.
How to improve bodyshop’s cash flow?
Collect faster, pay slower principle
Number one solution to improve cash flow of any business is to collect money from the customers earlier (preferably prepayments), but to pay the incurred expenses as further in time as can be possible (without jeopardizing relations with suppliers). Of course, it is easier said than done. The key, from my point of view is to treat your suppliers well (read more on this topic here), and always to keep your promises!
Forecasting cash flow
Foremost, find the pattern (if any can be revealed) in cash flow. If you pay a lot of taxes in February, or if summer is busy season, you can make some arrangements beforehand. If you enjoy scuba diving as I do, definitely, you know how important is to regularly monitor the air in the tank. Exactly in the same way, you should keep an eye on your bank account. Do not rely on some promised projects next month, they may never actually come. However, bills and suppliers will be there waiting for real money, not promises. Sometimes forecasts may fail, but inaccurate cash flow forecast is better than nothing at all.
Quite a few business owners avoid taking bank credit with an excuse of detesting being in debt. Nonetheless, even very large businesses, especially with constantly growing accounts receivable, get loans from their banks. Collision repair business is no exception; and often the invoiced work is paid after a few months. On the other hand delaying payments to suppliers puts a bodyshop in suppliers black list of bad payers. However if money is available at a good interest rate, then a bodyshop manager can get far better prices for “cash in advance” payments to suppliers. I strongly recommend to visit your banker and to negotiate the terms and rates of a business loan. You may be pleasantly surprised what you may achieve by getting spare cash.
Depending on the country, VAT (value added tax) payments could easily leave the bank account empty. If you are ”lucky” owner of bodyshop in Greece, than you understand me very well. Imagine that you must pay corresponding 24% of VAT end of following month (making it due roughly from 30 to 60 days); however, the average payments from customers are due only after 90 days. Simple arithmetic says that the bodyshop’s owner must find money to pay VAT on time, without being paid by the customers yet. Unless the profit margins are sizable or cheap bank credit is available, the cash flow most probably will be constantly negative. It goes without second though that meticulous calculation must be taken to avoid domino effect in company’s finances.
Timing is everything
One of the easy ways to improve your cash flow is to plan carefully when exactly certain purchases or expenses will be done. For example, if you have a big chunk of VAT to be paid the current month, probably it would be better to refrain from filling up paint consumables stock in the end of the month. Similarly, if you negotiate a payment term with “end of month” close, it may add up to 30 days to your repayment time if a purchase occurs at the beginning of each month.
Bodyshop is primarily a service provider, therefore keeping large stock of spare parts and paint related materials should be viewed as unnecessary. Instead chose a factor (jobber) with very fast delivery times and constant supplies availability. Not freezing cash in stock will improve dramatically an overall cash flow of any collision repair shop!
I hope I managed to convince you, my dear reader, to keep an eye on your cash flow. Remember, you have invaluable data in your hands – your incoming and outcoming money flow, which is only a click away. Cash flow uncovers your bodyshop’s overall business quality, and there is always space for improvement.
I got some ideas for this article by reading “Small Business Health Check” by Anna Hipkiss. If you want to “diagnose” your bodyshop’s health this reading would be great start.