Planning For Next Year and Beyond Part 2
Last time, we talked about creating a formal business plan for the future of your shop, and specifically focused on the importance of having a human resources plan in place. This time, we are addressing the financial aspects of business planning, and creating a long-range plan for your business.
Financial Trending & Forecasting
Many shop owners consider the financial aspect of business planning to be much easier to implement than other aspects. The main reason for this is that it’s much easier to find resources such as accountants, bookkeepers, business consultants, and some of the fundamental tools required. In addition, many software applications used by auto repair industry have a lot of fundamental tools integrated into the systems, and produce easy-to-read reports. Analyzing these reports, however, is a much more complex process.
Trending is a process of reviewing historical data, usually for 3-5 year periods. By charting past and current performance, you’ll be able to determine performance trends in various aspects of the business, including sales, gross profits, operating expenses, net profits, hours-per-repair-order, and effective labor rate.
Analyzing trends enables you to identify the business performance areas in need of improvement. Once they’re identified, you’ll be able to make informed decisions based on the data. When you make a decision to act, you’ll need to forecast anticipated performance, then track the actual results to see if they’re moving in the desired direction and at the desired rate.
In order to increase sales, most shop owners endeavor to do so by seeking out more customers, getting existing customers to bring in more than one vehicle, increasing vehicle return frequency, and increasing sales per customer. Part of your planning process would include your ideas and plans for improving some or all of these categories.
Other methods to increase sales may include adding lines of accessories, pursuing fleet accounts, taking on repairs/service of other makes, and/or offering different types of services. No matter what you decide to do, you must keep detailed instructions in writing as to what needs to be done, who will do it, and how it will be monitored.
There is almost always a cost of sales for the various revenue streams found in shops today. The cost of sales — technician wages, parts and supplies, etc — needs to correspond with sales pricing in order to yield the desired gross profits. For example, planning for increases in technical staff wages would mean that you may have to review — and possibly increase — your labor rates in order to obtain the desired gross profit.
There are two main types of operating expenses — fixed and variable. An example of a fixed expense is your building lease payment; an example of a variable expense is entertainment. Some other items referred to as operating expenses are actually investments, such as training. When you invest in training, you expect a return on your investment when that training is implemented.
Planning in the sales area includes evaluating every item listed in your operating expenses in order to keep those expenses in line with their relationship to sales or gross profits. Most aftermarket software applications consider operating expenses as a percentage of sales. Therefore, you must forecast budgets for every category and attempt to remain in line with those budgets. However, before you do, you need to shop for the best deals available. Some items to shop for include common variable expenses such as:
- Building maintenance and repair
- Credit card processing fees
- Employee benefits
- Insurance policies
- Interest rates
- Laundry service
Part of your expense planning should include the forecasting of owner and/or stockholder salaries. If you’re a subchapter S corporation and take part of your earnings in distributions, then you must include that amount in your projections for cash flow. The salary draws should be included in your cash flow statement.
Financial planning is made easier, of course, if you have a monthly balance sheet and income statement. A third element for analysis and planning, and a more elusive one, is a cash flow statement. A cash flow statement provides a complete accounting of how money moves in and out of the business. This is a very important document, and many shop owners do not have it available in their shop management software, nor do they ask their accountants to create one.
While trending and forecasting of the items previously mentioned are very important, there are other aspects to financial planning that need to be addressed as well — namely, capital investments, capital sources, and credit/collection policies and processes.
An example of a capital investment is the purchase of a piece of equipment. You’d have to analyze the need for the equipment and how you intend to pay for it, then forecast the return you expect from that investment. Then you’d have to plan when you would obtain it and who would be trained to use it.
In addition to planning major purchases, increasing inventories, or generating some other kind of activity with your business requiring additional cash, your planning process should identify several capital sources — where you’d get the money. You may want to establish or increase your line of credit, obtain higher levels of credit on existing credit cards (or obtain additional cards), mortgage either personal or business assets, or borrow from a private source. It may be wise to establish relationships with such resources just in case your business experiences a downturn and you need additional working capital until you’re able to recover.
Another process in financial planning is to institute specific credit/collection policies and processes. A significant percentage of our industry has far too much money out on the books, the majority of it coming as a result of not establishing and adhering to credit and collection policies and processes.
Here’s a useful tip: Establish a relationship with a collection attorney instead of a collection agency. Have that attorney provide you with the written tools necessary to enforce your policies and procedures. When you use a collection attorney to collect money owed you, you’re entitled to collect all of the money owed to you plus your attorney fees, instead of half of the money owed to you when collected by a collection agency.
Marketing and business promotion require a great deal of planning as well. Budgets for various aspects of marketing and promotion, including advertising, will fall under the financial planning umbrella.
Aside from budgeting money for this aspect of your business, you need to plan what marketing efforts you’ll conduct, and what your expected return on those efforts and investments will yield. Again, these efforts must be tracked, so actual performance can be compared against the forecast.
While this article is meant to provide a basic roadmap to help shop owners create and implement a formal planning process for the upcoming year, it is also important to develop a long-range plan for your business. Most industry survey results indicate that the majority of current shop owners are over 50 years old, which means they should have plans in place to ensure that the business continues on in case of disability or death. In addition, they should have a written and up-to-date exit strategy.
The plan that must be in place in case of disability or death is a business continuation plan, which describes what is to happen with the business should either of these two circumstances occur, when the expectation is for the business to continue. Among the elements of the plan should be who will have the authority to make decisions for the company, under what conditions will the company continue, who will control the money and assets, etc. Quite often, people fulfilling some of these responsibilities will be attorneys, accountants, heirs, and key personnel.
Part of a shop owner’s long-range plans should include an exit strategy. While most shop owners expect to leave their business at some point in time, few actually plan for it. Some shop owners expect to just shut the doors and walk away.
Some expect to sell the business when they get to the point where they wish to retire or change the direction their business life is taking. Others expect to pass the business on to a family member or a loyal employee. These latter options are referred to as a Business Succession Plan.
Regardless of how the business is to continue, you should develop a detailed written plan describing exactly how the process will take place, who is to be involved in it, and how it will be executed.
The plan should be put together under the guidance of professionals, such as attorneys, accountants, financial planners, business consultants, and tax specialists. One final tip: Remember to include a summary of your business succession plan in your Corporate Minutes Book each year.
Plan for the Future Now!
We hope that this article has stimulated your interest in planning, instead of just working hard day-to-day with little or no thought of, or direction for, the future. Everything you must do to develop a workable plan would be quite overwhelming if you tried doing them all at one time.
The most difficult part of the planning process is getting started. We suggest that you first build a team of competent advisors — an attorney or two (depending on their specialties), an accountant, a financial advisor, a tax specialist, and a business consultant knowledgable about the repair industry. Helpful resources in this area include trade associations, business associations, management peer groups like RLO Training’s Bottom-Line Impact Groups, and articles like this one. Once you put your team together, you can begin the process of planning.
Do not procrastinate! Thoughtful and thorough business planning can give you a competitive advantage, and that is why we heartily recommend it.
Feeling stuck creating your business plan? We can help! Call us at 800-755-0988 for a consultation.