Shop ownership is full of challenges and unexpected financial losses. Damage, theft, unsatisfiable customers, natural disasters, and failed partnerships all create heavily indebted and bankrupt shop owners. These stresses can lead to impulsive decisions, rushing, and difficulties with customers, all of which creates more unexpected losses.
Break the cycle by creating financial comfort yourself. Budget for those unexpected costs. This article covers the methods we recommend for shops to do just that.
The first step a shop can take to prepare for the unexpected is take out solid insurance policies. Work with a garagekeeper’s agent to help get you the coverage you need.
Unfortunately, your insurance policy may not cover everything. For example, we saw a number of instances where shop insurance policies did not classify COVID lockdown as a “business interruption event,” despite the loss of revenue.
Luckily for most shops, people still used their cars and required maintenance, repair, and used stimulus checks on upgrades. Auto repair shops and therefore most customization shops were classified as essential businesses and got to stay open to help their customers.
However, that does not mean shops don’t need to be prepared for business interruption and other unexpected, uncovered losses.
So, how do you budget for those unexpected losses?
We recommend the following:
1. Take an inventory of potential, unprotected financial risks (nonpayment from customers, faulty and warranty-less parts from suppliers, forced closure due to natural disasters, and so on);
2. Quantify the potential loss from those risks;
3. Double that amount;
4. Prepare to hold that amount in savings;
5. Include expenses in your cash flow budget to establish and maintain that cash balance;
6. Use your budget to calculate your labor rate for the year.
This method builds your new savings target into your income for the year. You don’t have to worry about tightened spending and paying yourself less.
Think back in your shop ownership career. Where have you taken a loss? Customers not paying, comeback jobs, theft, damage, failed partnerships, and business interruption are all prime examples.
How much did those losses cost you? $1,000? $5,000? $20,000? What impact did they have on your business?
Once you’ve taken inventory of your past losses, consider if there are any other situations in which you could find yourself spending money unexpectedly. Perhaps the warranty expires on a piece of equipment and it dies on you. You’ll have to replace it – will you be able to buy one as soon as possible to keep cars moving?
Unfortunately, we can’t cover every unexpected cost here, but simply taking the time to think through your inventory of losses and potential future expenses will give you more than enough clarity into your budgeting in the next step.
Use your budget to find your labor rate
Shop owners often run a very narrow profit margin, which can lead to desperate shortcuts, which are a prime cause of unexpected losses. It doesn’t have to be that way. Choose to take care of your customers, but make them pay for it.
When you’re desperate to avoid a loss or to make more money, you may choose to do some things that aren’t always in the best service to the customer. If we find ourselves more financially comfortable, we can afford to do what’s in the best interest of the long-term success of the customer relationship, and therefore the business.
Your shop will be financially comfortable and you will be financially comfortable if you have money in the bank to cover your unexpected costs.
In your budget, include the difference between your current cash balance and your target savings calculated earlier. Your customers are going to help you build up your savings.
Below are simplified instructions on how to make the calculation. Keep in mind that your actual calculation will be highly tailored to your specific shop depending on your costs, labor hours, and margin:
1. Add up all your costs for the year, both expected costs and your new savings;
2. Determine how many hours your technicians works in a year;
3. Work out your efficiency (what percentage of your working hours do you bill to customers?);
4. Calculate your expected billed hours for the coming year;
5. Divide your total annual costs by your expected billed hours (this is your labor rate cost basis); then lastly,
6. Add your margin (if you want a 20% margin, multiply your labor rate cost basis by 1.2).
The number you have calculated is your labor rate for the year, which includes savings to cover any unexpected costs.
Budgeting for unexpected costs is challenging because you’re operating in a world of uncertainty. Give yourself some certainty – save for those costs. Make it easy to save by making a justified increase to your labor rate. You’ll find yourself treating customers better. You may lose some business to cheaper competition, but you’ll build trustworthy and quality relationships with good customers and find yourself more profitable in the long run.
Driven Performance Advisors
Driven Performance Advisors helps shop owners increase efficiency and improve cash flow through our ShOptimizer services. Our ShOptimizer Finance package includes a customized labor rate calculator, a pricing strategy review, an easy-to-use budgeting tool and coaching for you to use it with confidence. Schedule a consultation at drivenperformanceadvisors.com.