Profit Problems? Why Reviewing Your Financials Wrong Could Cost You Thousands [E186] - Business By The Numbers
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This is the Aftermarket Radio Network.
Welcome to another episode of Business by the Numbers.
I'm your host, Tom Demers, CPA with Parmelas & Associates.
Some owners like to look at their finances daily, some weekly, and some never look at
them at all.
Seriously though, what is your rhythm for analyzing your financials and should your
focus change depending on what period you're reviewing?
That's exactly what I'm going to talk about this week.
Before we get into it, I just want to stop and thank you and the rest of the dedicated
listeners.
Remember, if you want to hear your question answered live 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 auto repair shop?
Shoot us a text at 301-307-5413.
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So the topic of this week's episode is what should we be doing with our financial, when
and how?
But what are you trying to do with your financials?
Seriously, this is a question because this is going to change how you are looking at
it.
And this is sometimes that often I have to step back and think to myself as
well too.
I have a client call up and say, I want to go down through my numbers.
Instantly in the back of my mind they want to say, well, how do I make more money?
How do I make more profit?
And for some of you guys listening, you might be saying to yourself, well, hunt, of course
that's what I'm talking about.
Why else are you going to look at your financials?
But I'll give you an example here.
If I'm trying to answer the question of did the productivity of my shop improve
yesterday, are you still going to be looking at your QuickBooks file?
Probably not because it's not going to give you that data.
You'll be looking at this daily and you probably won't even use your financials
at all.
It would be solely your shop management system.
Some of you might have tried to do this the same way and say, well, hunt, I want to use
my shop management software to figure out, did my profit improve last month or did I
do well or did I not?
That would be a terrible place to do that.
We would obviously be looking at your financials and probably end of month
financials to make that decision.
What are you trying to do here?
What are you trying to uncover in your financials is going to answer the question
when, how, and why.
But if you don't know what you're looking for on it, you need to start there first.
But that being said, you've now figured this out and you said, hunt, I know what
I want to look at my financials.
How do I do this?
I know that's all my financials.
I know that I need to kind of get into the nitty-gritty of this stuff and figure
out what's going on in my business so I can fix it.
But how do you do this?
When I talk about this, and this took me a little bit to think about because
when I look at financials, I'm pretty young, but unfortunately I've been doing
this for a long time, and it's almost like second nature.
Any time that you can teach someone else how to do something, you're always going
to learn something yourself.
But for those of you that have done it before, sometimes it's very hard to teach
something when you think, I don't know, I just kind of look at it.
When I kind of looked at my process and unpacked this, what I realized is looking
at your financials should be very much on how a scientist approaches his job
as well.
Depending on what your financials look like, it could be like the mad scientist
mixing together God knows what or Albert Einstein mastering the theory of
relativity.
Also, just like the scientist, do you think that day one, when that scientist
took that job, that they knew everything that they were looking at?
Do you think that the someone with 10 years of training might have a better
experience on that same data, whether it's financials or science, than the
someone that just started yesterday?
Financials are the same way, and I will probably put it over to sciences
that neither of which we were ever born with an innate understanding.
Financials are not an organic material, it's only through learning,
understanding, and oftentimes failing that you will actually understand this.
If you say, hunt, I want to look at my financials like a scientist,
what does this look like?
So scientists and testing and theories and things like that are all generally
kind of guided by one basic principle.
And that is called scientific theory.
It's a method in which people do science, I guess.
I'm butchering that.
So if you're a scientist, shoot me a text and tell me how much I've
messed this up.
But when I look at this, the way that a scientist works is they need to
figure out just like you, what is our problem?
You cannot start testing stuff if you don't know what you're trying
to fix or what you're trying to change.
The first issue or the first step of scientific theory is what is
your problem?
Identify the problem.
The second step is now we've identified the problem.
How do we fix that problem?
Let's kind of brainstorm some ideas.
There's going to be some instances out there where you might say
there is only one way that we can fix this.
And this is what we're going to do.
But in most cases, you're probably going to go down through and
figure out a number of different possible solutions.
Anyways, once you've identified a problem, once you've identified
what you think that you need to do to fix it, you need to
actually go out there and test that fix.
You think that was the issue?
Go ahead and change it.
You might be saying to yourself, well, my job as a scientist is done.
I've identified the problem.
I've kind of brainstormed on ways to fix this problem.
And I've figured out what I need to do.
And I've now fixed it.
I am a scientist.
You are not a scientist until you do the last step.
All you are doing right now is experimenting.
There is a difference between someone experimenting and
someone practicing science.
Because experiments are just meant to say, let's see how
this goes.
Did it go wrong?
The scientists will look at the final result and say, was
the expected outcome the actual outcome?
Did it differ from what I was expecting?
Is it higher?
Is it lower?
And based on the results, you go back and you redo this again.
You identified the problem.
You magically came up with the solution.
You implemented this and you analyzed this and you figured
out, yeah, that did fix my cause.
You're a scientist.
You're Albert Einstein.
It worked.
Is this how it's going to work on most financials?
Probably not.
Usually what it is is I went in and I fixed this.
It created that.
It solved this, but it created another issue.
Or you know what?
That moved in the right direction.
I think I might need to move this lever a little bit higher
to get my ultimate outcome expectations meeting the true
reality of what's going on here.
With anything, I like to give you guys kind of the
foundational knowledge to not only be able to use applicable
examples that I'm going to give you, but understand what
we're doing here.
Because really, if you have any sort of problem in your
life, you can kind of use a scientific method.
Whether you know it or not, you're already using this.
But seriously, as it relates more to financials, this
is the way you do it.
How you do this, the frequency you do this, the
reports that you use are all going to be different, but the
core process is the same.
Identify the problem, brainstorm on solutions,
implement the fix, and then analyze to make sure it works.
That being said, we need to go down through the most
common example that Hunt hears.
And I'm going to go down through this story from start
to finish and kind of give you the guidance on what I
would be telling the shop owner.
And for some of you that are my clients, this
conversation might sound familiar.
So anytime my client reaches out and says, want to kind
of go down through some stuff, having some issues,
just like you might imagine, I say, great.
What are we talking about today?
When I started doing this earlier, I usually, as soon
as I pick up the phone, here's what's going on.
Here's what you need to do.
But again, we're born with two years, one mouth.
You should always start with listening.
And so I say, what are we going to talk about today?
Here is one story, and it could probably apply this
to thousands of phone calls that I've had, but it
starts all very similar.
What is the problem we're going to talk about today,
Mr. and Mrs. XYZ client?
Well, Hunt, I do not have any profit.
And that is my problem.
And the solution is I would like to have profit.
Fairly basic, fairly cut and dry, but it is probably
the largest issue that anyone has.
You can have a lot of smaller issues, but if you have
a solid profit, you probably don't care about
this issues that month.
What is our solution?
What reports are we going to do?
What are we going to start to look for?
If we do not have profit, we are probably
going to use the same report that we've used
to figure out that we don't have profit.
If you're looking at a year-to-date summary
or a year-to-date profit and loss statement,
it says you don't have profit.
We are using that same report to figure out why.
If you're using the P&L to figure out why you did not
make profit last month, again, we are going to use
that exact same report.
The issues are right there, and the solutions
are probably in there as well.
So if I was to use an example on here of why
someone is not making profit, this is where
the road start to diverge.
Most people come in with the same problem,
yet most people's solutions or fixes
are drastically, drastically different,
depending on what kind of business you want to have,
how much money you want to make, what kind of stuff
you like to do, what kind of people you have on your team,
what kind of location that you're in,
and a number of different factors.
But to kind of give this one a true beginning-to-end
example on this, we are going to say that our solution,
or what we figured out by looking at this,
is that parts gross profit is the issue.
Labor look good, productivity looks good,
but man, I am giving away my parts for free.
So sure enough, we went down through the financials
and said, man, you're making around 20%
gross profit on your parts.
He talked to his coach and he was able
to get a parts matrix that he think
is going to get them up to 50%.
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So to recap this, we figured out we don't have a profit.
We looked in this case,
we were gonna use the monthly financial statements
and we realized everything kinda looks in line.
In this specific case on it,
we were probably comparing it to benchmarks.
And notice that labor was all right,
some of the margins were in line other than parts.
So always get the low hanging fruit first,
always kinda shoot for one solution
and we're gonna go with parts
and we think that's gonna work.
We should have an idea of what this looks like.
So we're looking at these numbers
and we're gonna try to paint a picture.
I think that my profit is down
because of my parts gross profit.
I think that if I fix my parts gross profit
that my overall profit will be fixed.
So that's one piece of this.
The other one is I think the changing my parts matrix
in the manner that I did
will not only change my gross profit
but enough to make me profitable.
Because really what we're looking for two things here,
if we're trying to take our parts margin for 20 to 50%,
we need to first confirm that that actually works
because we've agreed that unless we can take this
from 20 to 50%,
it's not gonna fix our underlying profit issue.
So if we need to figure out if that works,
if this happens,
if we do not get the proper parts gross profit lift
that we're expecting to,
we should never try to judge our hypothesis based on that
because we know we're not gonna hit it.
If this is our case, right?
We sit down, we talk to our accountant
and maybe hunt, this is a conversation
that we had with you
and we kind of get sent back out.
We're all right.
We looked at the monthly financials.
This is the low point on this.
Now how do we analyze this stuff?
Daily or weekly basis,
I'm looking at the shop management software.
Remember, I think that I have two solutions.
Parts gross profit is low
and then I'm gonna improve that
and then once that's improved for a month,
I'm gonna be profitable.
Again, looking on a daily weekly basis,
am I gonna be looking at QuickBooks?
Probably not, but why?
Because what are we trying to look for?
We are ultimately interested in looking at profit
but you pay your insurance on a one-time basis.
You pay your rent on a one-time basis.
You pay your payroll every couple of weeks
or maybe every single week.
Is this gonna be a very good judge
who give me an accurate daily profit level?
No, not at all.
Now, am I gonna be looking at my QuickBooks daily
to make sure they don't have fraud,
make sure that cash is getting the positive things
of the like?
Yeah, absolutely, but I'm not gonna try to look at it
for this specific issue.
Instead, I'm going to look at my shop management software
probably daily, definitely weekly
because I cannot test my theory on profit
until I can ensure that my parts gross profit issue
has been fixed.
And then this is what we call something
like a leading and trailing indicator.
Which one are you looking at
and which one are you trying to change?
You generally cannot change your profit.
Profit is a trailing indicator
that is actually a sum of everything else that you did.
So if you want to improve your profit,
you need to improve some sort of input
if you expect a different output.
Cars go in, people go in, productivity goes in,
parts matrix goes in, ARO goes in.
All of those are leading indicators.
Profit is just what happens
after you've done everything else.
Profit is low because GP is low.
Parts gross profit is not low
because profit is low.
This is not a two-way street.
There are some metrics that are a two-way street
which make this a little bit trickier
but parts a little bit of a simpler one.
Guys, on the timing,
you could be looking at this stuff at the end of the month.
Well, huh, I don't like to look
at my shop management software
so I'm going to implement this
and I'm going to take a look at the end of the month.
Well, great.
What you might find out at the end of the month
is that it worked exactly as expected.
And for the last 30 days, you've made more money.
What you might find out on the other side of this
is none of your changes made any different.
And the last 30 days where you thought
that you were changing and making more money
were all for naught.
What you will probably end up noticing is
I still made more money
but I probably could have made more
if I was on top of this
and I was making tweaks more real time
as I saw this happening.
Then this is why it's important
to always be looking at your numbers
throughout the year.
Why fix a problem in December or January
when you could have fixed that in April, May, June, July?
You are losing too much money
to not be looking at your financials
whether you know it or not.
And you might just say to yourself,
well, hunt, where am I losing money?
If you don't know where you're losing money
because you're not looking at the financials,
how can you also sleep soundly at night
knowing that there's no missing pieces here?
Finally, once we get to the point
of analyzing the financials, how we're doing,
we are truly testing your theory.
What you might be looking at here is, yes,
all of this starts with looking at monthly financials
for most things, not all,
but most things that I'm gonna be talking about.
And generally the end of all of this stuff
is again, looking at those same monthly financials.
The reason we're starting
and the reason that we're ending are drastically different.
We looked at the reality of what we have right now
and we know that we need to make a change.
We now have made these changes
and we have an expectation
of what that end result is gonna be.
What we're trying to do here
is trying to match up our assumptions versus reality.
When I look at the numbers,
and let's use this one for example,
I'm really testing my theory
about expectations versus reality.
I did an average amount in sales
with an above average parts gross profit.
So I'm assuming that I should be doing what for profit?
If we did average sales
and we increased our parts gross profit,
then I'm expecting my bottom line profit
to be better than it was.
What if I do?
If I look at this and it is correct,
is that enough for me to just be done with this?
Is that sample size big enough?
Is one month enough time for me to be certain?
Probably not.
If you do it one month, that's great.
If you do it three months in a row,
that's really good.
If you do it six months in a row,
this is probably what's gonna be happening
for the near future.
The issue here is when things go wrong.
If you go and you look at this
and say my parts gross profit is my issue,
I've now fixed it, I've now verified that I fixed it,
and I am now profitable,
this is an experiment gun
probably as best as you could ever imagine.
What happens if you take a look at this
and you say I was tracking this
on a daily, weekly basis?
I saw the parts gross profit go up.
It was exactly what I expected,
but I still did not make any money.
Why did this happen?
Really, you got to look at one of two different things.
The one is, well, was this not actually my issue?
Maybe you were trying to chase
after something that wasn't your core issue.
I'll give you an example of that.
Let's say that you went and you said,
you know what, for whatever reason,
sublet is where I need to make more money.
I will kind of cheat a little bit on here
and say sublet is not the area improvement
any of you guys should be focusing on.
It's a very small amount of your sales,
best case scenario we're making
like 15% margin on there.
So if that was your test,
your reality is going to be like,
go back to the drawing board
because sublet is not in.
There also could be something that is the expectations
or what you were expecting to see,
you kind of miss something.
You were not expecting to have to pay
that $10,000 property tax bill this month.
Even though your gross profit did go up
and even though your overall profit did,
your bottom line doesn't look like it did
because there's a one-time expenditure.
What usually happens is somewhere in the middle.
You did have an improvement,
not as much as what you're trying to see.
You also had some one-time expenditure
that you don't normally have
and this is where it all starts
to get a little bit confusing.
The good news is,
is you should not be looking at this yourself.
We live in a generation where you're picking up the phone,
hopping on a Zoom call.
All of you guys have resources
to be able to go and ask someone.
If you're one of my clients on it,
I am the resource for you.
If you're not one of my clients,
you're looking for your coach,
you're looking for another shop owner,
you're looking at someone that understands numbers.
Whether you know it or not,
you understand your business more than anyone else does.
You just might not understand how it looks
when you look it on financials.
Overall though, analytics and financials
are something that I think should be done on purpose
and not as a reaction or feelings when you feel like it.
To break this down into simplest term,
shop management software is my guide on the day to day
and even week to week,
I'm looking at my financials all the time
but probably on a more micro level
and seeing if these transactions are all approved.
To break it down on the simplest term,
a shop management software is my guide on the day to day basis
or sometimes even week to week.
I'm looking at my financials all the time
but probably more on a more micro level
and are these transactions approved?
Are these amounts relevant?
Are these things going into the correct categories?
Then at the end of the month,
I'm testing my theories
based on my shop management software.
And everyone should have an idea,
shop management software says higher than average sales.
GP is what I would expect.
I would expect QuickBooks to say the same
as long as my overhead remain constant.
If it is, then great.
If it isn't, then I need to figure out why.
Was my assumption incorrect?
Was there an outside influence
to make this month not truly representative or what?
This is where it can get really hard
but like I said, you do not need to do it alone.
You need to rely on your team, internal, external.
If you identify the problem,
there is somewhere out there
that can probably help you fix it.
Without knowing what your problem is
or even if there is one,
how would you ever expect to fix that?
As always, please share with friends.
If you have any questions or comments for future episodes,
please shoot me an email at podcast.paramelis.com.
Just wanna say thanks again
for listening on the Aftermarket Radio Network.
You can find more shows
on the aftermarketradionetwork.com
and on your favorite podcast listening apps.
Thanks again for joining me on Business by the Numbers.
Stay safe out there
and I'll 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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