Your bank account can be one of the most stress-provoking aspects of your business. Separate from your bank account, you have an accountant who helps you file your taxes. they probably send you a profit and loss report, which you have filed away. This article will show you how to unite your accountant’s work with your bank account to reduce stress and grow your shop.
At the end of the day, you can get by with a generic level of understanding of your finances. What does a generic level of understanding look like? It looks like knowing how much you made last year according to the IRS, knowing how much you’re making this year according to your shop management system, and knowing how much you pay in rent and payroll every month, because writing those checks always hurts.
If you have big goals for your shop’s growth, however, there are two key questions that a deeper understanding of your finances will help you answer.
1. What is your ideal growth strategy?
2. What is your growth budget?
Both questions require an understanding of trends, margins, and detailed profit breakdowns for each product (or service) you sell. Ultimately, you should be able to explain exactly why your bank account balance is what it is on any given day past or present, by understanding all of the financial activity in your shop for any given financial period.
Let me explain how you can use the financial information of your shop to create high quality answers to these questions.
What is your ideal growth strategy?
In order to formulate your ideal growth strategy, you need to know what products are capable of growing your business. In other words, which of your offerings are scalable?
To answer this question, you need to know detailed financial data specific to each of your products. A question that will emerge in importance is this: Which of your products has the consistent profitability to cover overhead costs? As you expand your sales, your overhead costs will expand too. Some of your products may actually be hurting your profitability more than helping it – your less profitable products could be taking time away from your more profitable products. At the end of the day, if you want to grow, you’re better off doing fewer things perfectly than you are doing many things adequately. Your ideal growth strategy may involve eliminating your less profitable offerings. First, however, you must be able to identify profit by what those are in detail.
In cost accounting, we allocate overhead costs to individual products based on a carefully selected allocation methodology. Using this cost allocation, we can more precisely identify which of your products hold promise for growth, and which are anchors holding you back. You can use square footage, technician hours, or some other relevant metric to allocate overhead costs between your products. Taking this extra step will give you much better data about the profitability of each product.
In addition to product-by-product profitability understanding, your ideal growth strategy can be influenced by the categorization of your spending.
A traditional cash flow statement has three sections. Cash flow from operations, cash flow from investing, and cash flow from financing. Operations are self-explanatory. If you’re profitable, your operations generate positive cash flow. However, you may find that even though you’re profitable on paper, the bank account isn’t growing. It probably can be explained by activity in the investing and financing sections of your cash flow statement.
Are you buying equipment to avoid paying taxes? Are you paying off a bank loan? Equipment purchases are an investing cash outflow and paying off a loan is a financing cash outflow. Neither of these transactions show up directly on your profit and loss statement or on your tax return. While these transactions don’t show up on your profit and loss statement or tax return, they are required to explain your bank account.
If you’re already spending money on investing and financing, are those items helping you grow? Identify what those items are, and evaluate whether you’re getting what you paid for. Depending on your answer, you can either include or eliminate that spending from your growth strategy.
What is your growth budget?
You have established what products are a best fit for your growth strategy. You understand your spending and know what you need to cut to free up cash. Now, you need to define your growth budget.
If you hire another person, how long do you have until you need them to be profitable? If you move into a larger space, do you have enough for the security deposit and build-out costs, on top of rent? How quickly do you need to finish the move?
You can find the answers to these questions by analyzing your financial trends. Look at your seasonality by the numbers. For example, if you hire someone in September, you’d want them to be profitable faster as your sales decrease going into winter. You’ll need to have a bit more saved up in order to maintain your cash balances appropriately during your new team member’s learning phase.
If you don’t have the cash to pay the new security deposit and build out costs, could you take on an investor or bank financing? That investor or bank may want to see clean books for the past three years. While that may be a lot of work, it also may be the difference between achieving your growth goals and falling short. You must be able to explain your financial trends to the investor or bank.
Whatever your source of funds, they will always want to see projected return on investment. How much sales growth do you anticipate your spending will generate? You’ll want to look back at your past financial information to understand how previous expansions affected your profits.
On the other hand, you want to avoid spending money just for the sake of growth, without confidence that your spending is going to generate higher sales and more profit. That confidence comes from looking back at your books and look for changes to your finances that were caused by previous operational changes. If you’re hired someone before, what happened to your money during the following six months? If you upsized your location before, what happened to your money during those few months of moving and getting set up?
If you can understand and explain this historical financial data and trends, you’ll be much better prepared to budget for your current growth strategy.
Between building your growth strategy and your growth budget, there is a serious need to deeply understand your financials and have the ability to explain your bank account. Rather than allowing it to be a source of stress in your shop, make it into a source of confidence.
Let me know how it goes – email me at email@example.com.
Driven Performance Advisors
Driven Performance Advisors creates profitable, efficient, and stress-free $5M automotive aftermarket shops. Schedule a consultation at drivenperformanceadvisors.com. Subscribe to DPA Weekly at drivenperformanceadvisors.com/dpaweekly.