30 Jun The Keys to the Financial Statement
Financial statements are intimidating. I don’t know anyone but an accountant who would disagree with me there. They can be particularly intimidating for Service Managers who weren’t trained for that part of the job. So, that means they have to educate themselves because understanding how they work is mandatory for the shop’s success. In fact, understanding financial statements is pretty much a requirement to be able to ascend the ladder.
But, with the right approach, mindset and a tracking strategy for before the financial statement prints—anyone can get great with financial statements.
The first point I want to make is about gross versus profit.
Too many times Service Managers are worried about gross instead of profits. But bigger isn’t better if you don’t understand the financials so you don’t want to chase a number that isn’t the top goal. Any owner of a dealership, independent or general manager is going to look at profit first, then gross. Unless you’re paying attention to expenses you run the risk of expenses outpacing gross and you can find yourself in a situation where gross is up 5% but expenses are up 14%.
Fixed Absorption can also confuse that because people think more gross, more gross, more gross but if the fixed ops out expends it, it isn’t fixed absorption. You can have really high absorption and no net. So, your gross is really high but you’re spending it to get there. And, there’s nothing worse than seeing a Service Manager work really hard and do a good job, then the shop loses money. And it happens all the time.
The second most important number is gross profit percentage.
That’s your Effective Labor Rate and what you’re paying your techs. You have to know that and you have to understand it because your Effective Labor Rate drives profit. You’re selling hours and what you sell the hours for dramatically effects your profitability.
Get a hold of all of your expenses so you can understand exactly what you’re spending every month. Because service department is labor it can be harder to do the math and find your true cost. But you have to find your break-even point so you know where you stand.
Third thing is to have a tracking strategy for costs.
Every shop has costs that need to be assessed BEFORE the financials are printed. What you don’t want are surprises at the end the month. Make sure you’re writing down or tracking all policies that the shop has, your personnel costs and business expenses to make sure it’s in check.
Remember you’re not stupid if you don’t understand this the first few times. It takes practice, it takes repetition. For your success and you’re growing don’t walk away with blinders on. See things clearly and manage your business from the financial statements. That’s your results – everything else is your feelings. Set goals for yourself because there’s no reason you can’t be 40% net to gross.
But it doesn’t happen by accident. It takes practice.