You opened a shop to do what you do best, which happens to be heavy-duty repair, not accounting. If finances aren’t your forte, that’s understandable. However, they are the language of business and, if you don’t speak the language, you’ll be lost. Plus, it’s not enough to know the minimum to get by. You need to be fluent. On the surface, mastering important accounting principles might seem overwhelming, but it doesn’t have to be. Just to prove it, here are 5 tips for simplifying shop financials.
#1) Avoid Double Entry
Putting part or all of your shop’s financial-related items on the computer is a step in the right direction. The next step is to ditch the paperwork. Many shops continue to use paper to take down service orders, relay information to techs and the parts department, and create estimates and invoices. All that paperwork wastes time, not only creating and handling it, but also in doubling the entry process. What’s more, increasing the times you enter information into your system also increases the chances of error. Ultimately, that means paperwork eats up valuable time. Plus, in the end, you’re never sure you’ve got all the bases covered.
Exchanging all the paperwork and double-entry for a streamlined system is an effective way of simplifying shop financials. One that everyone can access and use is the way to go. Think you can’t afford for techs to spend time entering info into software? Measure out the time they currently spend handwriting notes on paperwork and walking parts request over to the parts manager. Then, compare it to how quickly they can enter the same information into shop management software. You’ll see you actually can’t afford for techs not to be using a streamlined system.
#2) Simplifying Shop Financials by Reconciling
Reconciling is one of those financial/accounting tasks most people loathe. It certainly isn’t exciting, but doing it on a regular basis helps with simplifying shop financials.
Based on our experience, more than 80 percent of shops don’t count their inventory. Or, if they do, they don’t have a clean process for it. If you’re among those who don’t count inventory regularly, there’s no better time than now to start doing it. Approach it by doing a little bit every day. That makes it doable and keeps inventory from being a huge, unmanageable event once or twice a year. Count inventory in cycles—negatives daily, fast-moving parts monthly, slower moving stock quarterly, and count parts that you sell the least twice a year. Getting your inventory right simplifies things by ensuring your cost of goods will be right.
When reconciling bank accounts, remember that includes credit card accounts, too. And, be sure to use all the tools you have to your advantage. For example, run reconciliation reports in your shop management software, and connect your accounting software such as QuickBooks to your bank and credit card accounts online. Those two steps alone will vastly cut down monthly reconciling time.
Finally, no shop is too small to reconcile vendor statements. Businesses of every size should do it. Make sure everything on vendor statements are legit and accounted for. That includes finding out where those parts are before you pay for them. Think a $100 part isn’t significant enough to track down? It takes an extra $1,000 in business just to break even on that unaccounted for $100. Considering small shops average $1,000 to $2,000 in lost parts monthly and that translates into $20,000 wasted labor, it seems small shops are the ones that can least afford to skip reconciling vendor statements.
#3) Don’t Over-Engineer It
By definition, simplifying shop financials means not over-engineering the process. It’s easy for any shop to get sucked into a complex system. Ones that have been in business forever often have complex accounting systems. Micromanaging costs time, and time is money. Streamlining the process, then keeping it simple helps immensely.
Creating a simple chart of accounts is a great place to start. It can’t be too simple—you need more than one line. On the other hand, the chart should be simple enough for anyone to be able to look at it and understand what’s going on. What’s more, crafting an effective chart of accounts shows you at a glance if you’re making money in key areas.
Looking for a place to start? Use the Matching Principle to build your chart of accounts. It matches income accounts to the cost account that produces the income, like this:
|Income Accounts||Cost of Goods Sold Accounts|
|Labor Income||Cost of Labor|
|Parts Income||Cost of Parts|
|Sublet Income||Cost of Sublet|
|Shop Supplies Income||Cost of Shop Supplies|
|Service Call Income||Cost of Service Calls|
Because every income account has an expense counterpart, comparing them shows if you’re losing money somewhere, like shop supplies. It can also reveal if you could be making more money somewhere else. One example is if you’re subbing out enough work to justify hiring on another tech and keeping that money in-house.
#4) Avoid Common Pitfalls
Many bookkeeping and financial principles are difficult to understand unless you earned a degree in accounting. If you’re not a CPA, there are some common pitfalls to watch out for, such as confusing “items” and “accounts.” An easy way to distinguish them is to remember that items are for billing customers and accounts are used when entering vendor bills.
Another example is using the undeposited funds account versus taking payments directly into the bank account. Use the undeposited funds account when recording received customer payments to keep a record of each individual payment transaction. Then, make one consolidated deposit from undeposited funds into your bank account. A lot of shops don’t use the undeposited funds account in their accounting. However, it plays a part in simplifying shop financials once you understand it. It makes everything, especially reconciling, easier in the end.
Finally, accounts and classes can be confusing. Classes are like tags for transactions that tell you something about those entries. They’re a great tool for businesses with multiple locations. In those cases, an example would be to use the same labor income account for all locations, but a different class for the transactions telling you in which location each one took place. Classes can be useful for small shops, too, especially ones that offer mobile service. They’re a great way to track how well your service calls are doing.
#5) Use a Month-End Close Checklist
There’s a saying that the difference between a professional and an amateur is that the pro writes things down. Even the smartest people can’t rely completely on their memories, and that’s especially true in business. That’s why, if you’re committed to simplifying shop financials, using a month-end checklist is vital.
First, develop a cadence of reporting, a routine, a system—and stick to it. Do it weekly, monthly, quarterly, or according to another timeline. Whatever your routine, it gives you a chance to close the books so you can start the next period fresh.
Second, put a checklist together. List all the things that will allow you to have a clean break on that month’s financials. A general list might look like this:
- Enter vendor bills
- Reconcile vendor bills
- Enter customer invoices
- Enter customer payments
- Reconcile bank accounts
- Reconcile inventory
- Complete other necessary reconciliations
- Run financial statements
- Close the period
- Distribute financials
You won’t believe how good it feels to resolve everything and know you have a clean slate for the next go-round. It might seem like a big process. But, once you’ve done it a few times, and if you keep it simple along the way, it will go faster each time you do it.
We mentioned how putting your financials and accounting on the computer is useful. However, many shops try to find one piece of software that does both shop management and accounting. Unfortunately, there isn’t one out there that truly does it all and does it well. No software can be everything to everyone—vital elements get lost when one company tries to make that happen.
While software is ultra-effective for simplifying shop financials, you need to find the best of breed software that accomplishes each goal. Plus, they need to talk to each other. The perfect example is pairing your accounting software with Fullbay. Fullbay is the shop management software that takes care of everything on the management side, including organizing inventory, orders, and jobs to make accounting easier. With Fullbay, you enter everything once, eliminating double-entry and errors. It helps you build and run reconciliation reports to make reconciling inventory, banking, and vendor statement a piece of cake. Plus, it’s intuitive to use and helps keep things simple. That allows you to avoid the common accounting pitfalls that plague every business. Get started right now. Fill in the form below and let Fullbay help with simplifying shop financials.