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Is Your Shop Management System Lying to You? [E185] - Business By The Numbers

Is Your Shop Management System Lying to You? [E185] - Business By The Numbers

Remarkable Results Radio Podcast Aug 28, 2025 26 min
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About this episode

Exploring the reliability of shop management systems, Hunt Demers highlights the common discrepancies between these systems and financial software like QuickBooks. He shares a client's alarming inventory report that revealed negative figures, emphasizing the importance of accurate inventory tracking. The episode delves into how inaccuracies can lead to significant financial consequences, including tax implications. Demers stresses the need for shop owners to fully utilize their management software, maintain accurate records, and regularly reconcile data to ensure their business operations run smoothly.

Topics: inventory accuracy shop management systems quickbooks discrepancies accounts receivable financial implications tax consequences data reconciliation staff training process improvements
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This is the Aftermarket Radio Network.
Welcome to another episode of Business by the Numbers.
I'm your host, Hunt Demers, CPA with Parmelas & Associates.
I was working on finishing a client's tax return and reviewing some of their inventory figures.
Super common thing to do to verify that we're not paying tax on inventory that we're
sold at the end of the year.
The issue started like most of these conversations do, and the client was thinking that the numbers
were not making sense.
However, when we started looking into a shop management system, we realized that they weren't
going to help us much, but why?
Before we get into that, I just want to stop and say thank you to you and the rest of
the dedicated listeners.
Remember, if you want to hear your question answered on here or just have a question
for me, shoot me an email at podcast.parmelas.com.
Want to talk to me about accounting and tax services for your shop?
Shoot us a text at 301-307-5413.
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Almost all shops run two sets of books, but probably not like what you're thinking.
Yeah, we've all heard the stories and this kind of probably predates my time in the industry.
Of the classical shop owner walking around with a pocket full of cash because none
of that cash actually hits a bank account or any sort of financial systems that we
see.
Flash forward to 2025, cash is almost illegal in some places.
Seriously, I have clients that are getting fees for depositing cash, and realistically
cash is just not a large portion of most of my clients' payments or sales.
That has led to what you would think would be increased accruing a shop management system.
People are putting things through there, there's not payments that are missing it, and people
are able to rely on that without question.
Is that the case for your shop?
Is that the case for most shops?
And this is where we start to see some alarming things.
When we're looking at our shop management software and we're looking at QuickBooks,
these are the two sets of books that we really look at.
I'm going to ask you the question, which one do you think is right?
You as a business owner should be saying they're both right, Hunt, because they're speaking
the same language, and that is the key of this episode and that is exactly what we're
going to talk about.
Which one is right?
Which one is wrong?
Is a trick question because they should not be different.
QuickBooks is the financials of reflecting what's going on in your business.
Your shop management system is also reporting those same figures from a sales perspective.
Tell me why we should have any discrepancies, but then again, we wouldn't be having this
episode if it wasn't a common issue and probably an issue that a lot of you guys are not
aware of.
The nice thing about having two sets of financial information or two sets of data for any
business on it is it gives us a lot of tools when we have to track down an issue.
We're going to have situations where accounts receivable or inventory or parts cost are different
between QuickBooks and your shop management system, and you need to understand the differences
to figure out why there is some.
So if we go back to the question which one is right and which one is wrong, you tell
me.
Your shop management system is what you think that you sold, and QuickBooks is
what you actually paid out to people or received from customers on it.
Which one is reality?
It's probably different on what you're looking at here.
If you want to say what's reality, what went out of the bank account, that's QuickBooks.
If you want to talk about what's reality, what went out of that shop and what did I
invoice, that's your shop management system.
They shouldn't be different, but why do they happen and what are the common cases
that we see.
When I was talking to my client and we were discussing his end of year inventory,
I want to kind of be clear on some things, but obviously some of this is private.
The general idea on here is both of us thought that this inventory figure that
we were looking for was somewhere between $30,000 to $50,000.
It's been a client probably about 10 years on it.
His inventory does swing up and down, but like I said, for the last nine years,
it's been very close to in that range on it, maybe a little bit up, a little bit
below.
Now we were starting to look at some things that were giving us some really
wacky information.
I said, you know what, time out.
Let me just pull your shop management system to see what's going on there.
This client uses a unique shop management system, and you might be saying to
yourself, well, hunt, why didn't you guys see this before?
This is a little bit more of an antiquated piece of software, which is probably the
crux of the issue of why this happened.
We've always kind of gone off of his physical inventory count, and he always
gives us these figures on it and has kind of mentioned in the past,
I'm not sure that my shop management system is 100% right.
What I took that as is it thinks that I had 400 tires and I really had 410,
but what we were about to find out is something much, much worse.
XYZ client on it just sent me the inventory report.
Let's see what that says on there.
And if we still need to have some adjustments, we'll go from there.
Sure enough, he sends me out of the inventory report and immediately I knew
that we had an issue and why.
Well, you might be thinking, well, hunt, you look at this stuff all the time.
There must be some sort of innate sense that you have of these are not
accurate information.
Maybe the shop is not big enough.
Maybe the shop is too small.
No, guys, the inventory reports that he had negative $500,000 in inventory.
Anyone that's listening to this episode and probably most of your children,
once they understand the idea of negative numbers,
know immediately we have a massive issue.
The thing that my client mentioned was accurate in one way and inaccurate in
another way.
His response to me was, yeah, hunt, I kind of figured it was bad, but
I'm not that concerned about it because I have a really good handle on my
inventory.
That right there should be alarming to most and maybe some of you are still
confused.
Well, this guy says he has a good handle on his inventory.
How could someone have a good handle on an inventory when their inventory
management system is not accurately reflecting what they're receiving,
what they're selling, what they're returning, what they're getting credited
for, what they're losing, and what's getting stolen?
When he says he has a good handle on his inventory, that means that
when he does a physical count four times a year,
he feels very accurate that that inventory number is correct.
But since this client is not tracking this and
the inventory figures is not correct in the shop management system,
that means that his end of day report and his parts cost is also not
accurate.
You might be saying to yourself, well, hunt, how can his parts costs
not be accurate?
Why does that have anything to do with inventory?
If we still think that we have an inventory, it means that we did
not sell it.
And if we think that we don't have an inventory and we really do,
that means that we think that we didn't sell it and we actually did.
This could go both ways.
Hunt, if he has a good control on it, he can still find those tires.
He can still find that water pump.
What is the issue?
The issue is that we use these reports as a check and balance.
When we look at your sales, we match it to your accounts receivable
and make sure that that cash that you receive gets deposited.
Great, right?
Now, when we're looking at something like your parts or tire margin on it,
we use actual cost.
This is how much you sold.
We're going to verify that you got the deposits.
But when we look at cost, I'm not looking at what you think you paid.
Let's measure this.
Let's make sure we're actually paying our vendors what we think we are.
This client had a lot of volume and so we had had some of these
discrepancies issues over the past.
But this inventory really highlighted the crux of the issue.
How are we going to ever try and chase down the discrepancy
between what we think we're purchasing in QuickBooks
and what we're purchasing in management software
when we know right off the back that that shop management
software is incorrect?
Now, you might be saying to yourself, well, hunt.
How can this person accurately run his business?
How can he ensure that he is not having employees steal tires from him?
How is he not ensuring that his vendors are inaccurately
invoicing him for parts that he's not receiving?
How can this client accurately confirm that he's getting his warranty
credits, returns, credits, and things of that?
And a short answer on that is, even though this guy feels like
he has a very good, quote unquote, handle on his inventory,
there is no way he can do any of those because he does not
have the check-in balance.
These two sets of books your shop management software
in QuickBooks are supposed to be able to chase down these issues
fairly quickly, but in the case where it's not being set up
correctly or not being managed correctly on this,
you turn into creating more questions than answers.
We wanted to use shop management software to give us some
answers to a fairly simple question regarding QuickBooks
and taxes and what it led us to is even more confusion
and for my client, a big project.
I don't know how to build a repair order
and to a large extent, I don't know how to go in
and adjust individual inventory items
in your shop management software
because we don't generally touch the front end of your software.
We're dealing with that stuff after the fact.
However, after the fact, I can tell from your reports
if you don't know either
because they won't help me or my team at all.
These are the common problems that I see, like I said,
the story that I wanted to lead off is, like usual,
a bit of a hyperbole and a bit of an extreme situation,
but what do these issues look like
or what kind of issues do we see rearing up in shops
that are a little bit more common
and then sometimes a little bit more subtle as well
or smaller dollar amounts.
Like I said, one of the biggest tool that my firm uses
to compare is shop management software to QuickBooks,
but if the shop management software is not right,
then what are we comparing it to
or what are we confirming it to?
We're gonna start off with inventory.
Inventory is probably the number one issue
that you guys are having
in your shop management system right now.
And I'm gonna really push on this to say
if your inventory is not 100% accurate,
then it's just the same as my client before.
Well, hon, it's pretty close.
If you're not using it to an entirety
and you can't trust that inventory number
that you run out of your shop management software,
then I would argue there's no point in using it all.
90% accurate information is probably the most dangerous
because in a lot of cases, it looks like the real results
but in a lot of cases,
you would have no idea if it's completely wrong.
If you're gonna use the shop management software,
use it 100%.
Don't use bits and pieces of this
because we're in a day and age
where all this stuff is too interconnected.
Yeah, maybe that individual line
is not gonna affect something else
in your shop management software,
but can you confirm it's not gonna affect your accountant
or someone on my team
when we're trying to figure out an issue
or highlight a problem?
Do most of my clients inventory numbers look like this?
No, because we're looking at most of these
on a monthly basis
and immediately once we saw this go negative,
we would have known that there was an issue.
However, what is more common
is we'll get an inventory report
that could be in some cases 50, 100 pages long.
And I see an inventory at the end, 225,353,
the material elite looks in line
with what I'm expecting on that.
Is there gonna be any way for me to be able to go
and confirm that those 30 tires,
combined value of 15,000 actually are no longer there?
No, and these are the kind of subtle differences
that are probably going on in your books
that could be costing you money.
I'll give you a great example
or something that you can go back with.
If you have $15,000 worth of tires
that is still sitting in your inventory
in your shop management software,
which means that your accountant is gonna verify that
and still gonna be sitting in your inventory
on your financials,
that means that you missed $15,000 in expenses.
That $15,000 shouldn't be an inventory
and should be in your cost of goods sold.
You might be saying, well, hon, that's 90% right.
My inventory was very close.
Well, that 90% accuracy
probably cost you around $5,000 in taxes
or lost you around $5,000 in missed tax savings.
The stuff is big.
Also, again, put that into dollars and cents.
Imagine if I went to you and said,
you might have $15,000 worth walk out your back door.
You would yell and scream and say,
my bookkeeper would never do that.
Yeah, of course, because you're overseeing them.
You're verifying this stuff.
Why aren't you doing the same for your tires,
for your inventory?
This stuff you pay good money for.
You pay real money for it is your sole business.
We need to have a handle on all of it.
Adjusting inventory, keeping your inventory module accurate
is probably what you expected me to say.
It is the number one issue in shop management software.
Some shop management software's inventory module
is much better than others.
Also, a lot of you guys feel like
that you do not have a material level of inventory.
I'm talking about guys $200, $300,000.
Most of you guys are actually pretty good
at tracking your inventory.
You know who the worst ones are?
My guys that have $5,000, $10,000, fluid and filters.
Oh, hon, I don't have inventory.
I have fluid and filters.
Great, perfect.
Your shop management software should still say the same.
Some of you guys that might be guilty of this
where you're not good at tracking that inventory
because you don't quote unquote keep that.
If you only have $8,000 in inventory
and you pull up your shop management software
and it says two, negative two, 12, 15, whatever it is,
it's wrong and it's just as wrong
as having it $100,000 off.
Get the stuff accurate because I will guarantee
it's not gonna cost you money
and it could very well end up saving you a good bit.
You guys get it, hon.
I'm gonna go and update my inventory.
I'm gonna figure out how to date my inventory.
I'm gonna call my shop management software
because I've been putting this off.
You need to do it
and you also need to stay on top of it.
Inventory corrections are a one-time thing.
Training your front counter and the rest of your team
to do this stuff correctly
is really what you need to be looking at.
Once you do one inventory correction,
if your team is using the shop management software correctly,
you never should have to do an inventory adjustment again.
Why?
Because if you returned it, it should be marked an inventory.
If you sold it, it should be marked an inventory.
There's not really any situation where you'd say
that just should be removed from inventory.
What do we do with it?
And if I am removing it, I want a reason why.
Some of these ones we're gonna talk about
are simpler than others
and some of these are probably gonna have some intricacies
depending on what shop management software you're using.
When there is kind of slight differences here,
I will try to mention it.
But again, like always,
I want you guys to understand the ideas,
not specifically try to translate this into hunt.
How do I do this
on what XYZ report in tech metric or shopware or whatever?
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Behind inventory,
the next biggest one that we see the most
and probably causes the most issues on it
is accounts receivable.
Well, huh, I don't really do any accounts receivable.
Well, your shop management software
should say the same thing.
If you don't do any accounts receivable,
I should be able to pull up your accounts receivable
aging and show that people owe you zero dollars.
What ends up happening a lot,
and this is especially for new clients that we get,
is people do not feel like
the accounts receivable is important.
If you are a cash basis taxpayer,
you're cash basis financials,
you are only paying tax
on what actually gets deposited in your bank.
And a lot of times I know that
because I see it in your shop management system.
Your accounts receivable shows $300, $500,000
because the way that you were doing your financials
in the past is it didn't matter.
If it doesn't go into bank account,
I'm not gonna get penalized for it
and I'm not gonna pay taxes on it.
Where this gets highlighted immediately
is when we take on a new client,
we always do our books on a cruel basis.
If this is what you think that you sold,
we're gonna then reconcile the cash
to make sure that that's what you received.
If you have duplicates,
if you have write-offs that are still stuck
in accounts receivable,
it almost works out exactly the same
as having overstated inventory.
If your accounts receivable are overstated by 15,000,
just like inventory,
it's probably costing you $5,000.
You're paying tax on sales or money
that you're never gonna collect
or as a duplicate or an error.
Looking at this periodically,
making sure that the customers on there
are either accurate customers
and we're getting money from them.
Or again, if we're not gonna collect on this money,
let's write it off so we make sure
that we're not paying taxes on this stuff.
Where this starts to get a little bit wonky on here
is you might pull up that report and you say,
well, hunt, I got negative numbers
on my accounts receivable report
and I know that this is wrong.
Well, you gotta slow down a little bit
on the accounts receivable.
The only reason I mentioned this
is I've talked about this before
and this is the first question I got back.
Can I have negatives on my accounts receivable?
Yes, it's not super common on it,
but I do see negative accounts receivable.
If you have customers that make deposits on your jobs,
let's say a customer that came in
and gave me a $3,000 deposit.
Some shop management system would look at that
as a customer deposit separately.
A lot of shop management system would just look at it
like that we owe that customer $3,000.
Inventory is a bit simpler.
We can do a quick spot check on that to look
and if we see a negative,
it's wrong, we know we have an issue.
Accounts receivable should be much smaller
and you're gonna probably have to do a little bit more work
to verify this stuff.
Again though, just like inventory,
if you fix your accounts receivable once
and you have process and procedures
and your team follows those process and procedures,
there should be no reason to have to adjust this
significantly anytime again in the future.
What am I saying?
I know you have a big project on it.
Rip off the bandaid, get it cleaned up,
talk to your shop management system
if there was a way that you can do it faster.
But guys, really, this is important
and I really, really strongly encourage this stuff.
These last three that I'm gonna go down through
are not necessarily ones that I see people making mistakes
on, which they definitely are,
but also some ways that you could maybe be using
your shop management system
to a little bit more of its potential.
Payment types.
Well, Hunt, what do you have?
Some sort of magical payment type
that I've never heard of, maybe.
In payment types, we can use that
in a similar way that we use for discounts.
We can also use payment types to reflect bad debts.
We can use payment types to reflect internal shop vehicles
or even some owner's vehicle as well.
When we are doing shop vehicles
or if we're doing an owner vehicle on this,
we still probably wanna record the sale,
like we're talking about before.
Any part, any sale that's going down through there,
whether I'm paying or someone else is paying,
I wanted to look exactly the same.
Like we were just talking about a minute ago though,
well, Hunt, if I have an invoice for myself
that runs down through there,
I don't wanna pay my own invoices
and that's just gonna sit in a count's receivable.
Well, what we're gonna do here
is we're gonna set up another payment type
called shop vehicles, called internal vehicles,
called loaner cars, called tow trucks,
depending on what you're trying to do with this.
And when we have that internal vehicle go through,
we can now use that payment type
in a lot of shop management systems.
They have another payment type you can set up.
In a lot of those,
we just set these up as an other credit card
and we name it something very, very obvious.
The way that it works for this is this now allows us
to have process and procedures for all jobs,
even non-paid work.
If you wanna talk about how do I do this warranty work,
how do I actually write this off,
I've done whole episodes on it,
we're not gonna kinda get into it today,
but the big thing on this is guys,
if you're saying, well, I got these non-payment,
I have this barter work I wanna track,
I have this kind of advertising partnership
with another business where I just write off their work,
use these payment types, it could be very cool.
You wanna track warranty where you screwed it up
versus warranty where it's parts failure,
a lot of people set up two different payment types for that.
One word of warning on this stuff,
and I kind of do the same thing on profit first,
I don't wanna see 50 different payment types, neither do you.
There should be at most probably five,
and that's still probably too much.
Because again, you might have different situations,
but think to yourself,
if I call these situations differently,
would I look at them in a different light?
And if the answer is yes, then track it separately.
If it's not, keep it simple,
no reason to make your financials
or your shop management system
more complicated than it needs to be.
The next one on here is,
and I think this might be a Mitchell name on it,
but category profit summary.
Profit, parts profit by vendor type,
parts profit by subcategory.
Essentially what we're trying to say here
is we're looking at the end of day report
to business summary report,
and we see that we made arts margin of 50%.
This category profit summary report,
this part sales by vendor,
it's called a number of different names
depending on what the shop management system is,
but it's essentially a way for us to say,
all right, our overall parts margin was 50%.
If I want to improve that I wanna analyze this,
we probably have some subcategories
that I'm doing very well on,
and probably some subcategories that I'm not.
The most common situation that I use this on
is something like this.
The client probably doesn't have 50% parts margin
I was probably not diving into it that much,
but the last time I used this,
the client had like 35% parts margin.
They were shocked to hear this
because they were shooting for 50%,
and from being on the counter, my client was like,
I feel like most of the tickets that I create are as such.
What we did in this is we went down
and we took a look at his category profit summary,
and I was able to look,
this one actually gave us labor in parts,
is that almost every single subcategory
that he was doing, and sure enough,
his parts margin was like 55, almost 60%.
Unfortunately, there was one category
where his parts margin was almost negative.
Some of you might be able to guess what that was,
but that category was oil changes.
What this allowed my client and myself to do
is take a look at this,
and then again, set our expectations.
You would like to increase your parts margin
as an overall whole.
We've now analyzed your business
and realized that pretty much every sector
of what you're doing,
your parts margin is very good,
and arguably is gonna be very hard
to increase it that much.
What my client is left with is really a big decision.
Do I actually wanna increase my overall parts margin,
which probably means raising my oil change pricing,
or do I need to look at this a little bit differently
and not beat myself up too much?
There is a lot of businesses out there
that can run consistently
with a very good profit at 35% parts margin.
Is your business one of them?
Maybe, maybe not, but using these reports
can kind of unpack some of these oversimplified numbers
into more usable subcategories.
The last one on here is just kind of a catch all
and it's can jobs.
Hunt, what is a can job?
And a can job is whatever you define it as,
but the way that I look at it is
these are prepackaged items
that sometimes don't get looked at very often.
Some of you guys might be saying,
well, Hunt, I don't prepackage anything.
Other of you are saying, well, Hunt,
pretty much everything that we sell
is packaged as a maintenance package,
break package, the sentencing package, whatever, you name it.
Have you looked at them lately is my biggest question.
The reason I say this is some shop management system
when you increase your labor rate,
it actually increases your can jobs.
Also, depending on how you have those can jobs set up,
sometimes increases in rates,
margin are not gonna have any effect on can jobs.
This one kind of segues right back
into the category profit summary,
because a lot of times when you look
at a category profit summary,
you can analyze this issue.
Our parts margin is kind of creeping down
the last couple of months,
but I feel like just like Hunt's client,
most of the tickets I'm seeing are pretty darn good.
I've seen this in the past where people go down through
and look at it and say, it's my AC service.
My AC is the one I'm getting killed on,
and they realized that package AC service
hasn't been updated for five years.
You are trusting this system.
You are trusting the software implicitly.
And a lot of times blindly on this, verify this stuff.
If you think you have five grand in inventory,
it better say that.
If you think you don't have any AR, it better say that.
And if you think that you're making good money
on your can jobs, it better say that as well.
None of this is going on in your shop
or your shop management software.
Great, but you should really be looking at this
frequently because it might not be the same story
in three months, one year, et cetera.
You wouldn't ever use a portion of your scan tool
or your alignment machine.
So why do you feel comfortable doing the same thing
with your shop management system?
Use all of your tools to their fullest extent and correctly,
and you will have a business that you'll be proud of.
As always, please share with friends.
If you have any questions, comments,
or ideas for future episodes,
shoot me an email at podcast.parmelis.com.
Just want to say thank you
for listening on the Aftermarket Radio Network.
You can find all shows
on the aftermarketradionetwork.com
and on your favorite podcast listing apps.
Thanks for joining me on Business by the Numbers.
Stay safe out there and I will talk to you all next week.
You've been listening to Business by the Numbers
with Hunt Demerist on the Aftermarket Radio Network.
Follow Hunt on your favorite podcast listening app.
Let him know what you'd like him to cover.
His email is in the show notes.
Hunt is all for advancing the aftermarket.

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