Analyzing financials can be daunting, but it’s a crucial part of running a successful auto repair shop. Whether you’re a seasoned business owner or just starting out, understanding your financials helps you make informed decisions, drive profitability, and boost productivity. This blog is based on episode 127 of Business by the Numbers financial podcast for automotive (or any small business) shops. Click here to listen to the episode!
Why Financial Analysis Matters
Financial analysis is the process of evaluating your financial statements to understand your business’s financial health. This involves looking at various metrics and using specific tools to get a clear picture of your shop’s performance. For auto repair shop owners, regular financial analysis can uncover areas for improvement, identify trends, and help set realistic goals.
financial analysis can uncover areas for improvement, identify trends, and help set realistic goals.
Daily vs. Monthly Financial Reviews
Your approach to financial analysis should vary depending on the period you’re reviewing. Let’s break down the differences between daily and monthly reviews:
Daily Reviews:
- Focus on Productivity: Use your shop management software to get real-time insights into your daily operations. This helps you track key metrics like labor hours, productivity rates, and daily sales.
- Immediate Adjustments: Daily reviews allow you to make quick adjustments to improve efficiency and address issues as they arise.
Monthly Reviews:
- Focus on Profitability: Use financial statements from QuickBooks to get a comprehensive view of your shop’s profitability. This includes analyzing income statements, balance sheets, and cash flow statements.
- Long-Term Planning: Monthly reviews help you track trends over time, set long-term goals, and make strategic decisions for your business.
Key Metrics to Track
To effectively analyze your financials, focus on these key metrics:
- Productivity: Measure the productivity of your technicians using your shop management software. Track labor hours, job completion rates, and efficiency.
- Profitability: Analyze your monthly profit by reviewing your income statement. Focus on net profit, gross profit, and operating expenses.
- Gross Profit: Monitor parts gross profit to identify areas where you can improve your markup and overall profitability.
The Scientific Approach to Financials
Think like a scientist when analyzing your financials. This involves four key steps:
- Identify Problems: Look for issues in your financial statements that could be affecting your profitability.
- Hypothesize Solutions: Develop potential solutions to the problems you’ve identified.
- Test Solutions: Implement the solutions and track their impact on your financials.
- Analyze Results: Review the results to see if your solutions have made a positive impact.
Examples of Financial Analysis
Let’s look at a couple of examples to illustrate how to analyze your financials effectively:
Example 1: Improving Productivity
- Problem: Your shop’s productivity is low.
- Solution: Use your shop management software to track labor hours and identify bottlenecks.
- Test: Implement changes to improve workflow and efficiency.
- Analyze: Review the impact of these changes on your daily productivity metrics.
Example 2: Increasing Profitability
- Problem: Your monthly profit is lower than expected.
- Solution: Review your financial statements to identify areas where you can reduce costs or increase revenue.
- Test: Implement changes such as adjusting your parts markup or reducing overhead expenses.
- Analyze: Track the impact of these changes on your monthly profit.
Conclusion
Effective financial analysis is about using the right tools and maintaining a consistent review schedule. Whether you’re looking at daily productivity or monthly profitability, having accurate and timely financials is essential for making informed decisions.
Remember, financial analysis is an ongoing process. Continuously monitor your key metrics, make adjustments as needed, and use your financial data to drive your shop’s success. Stay tuned for more insights on managing your auto repair shop’s finances. If you have any questions or topics you’d like us to cover, shoot me an email at Info@paarmelis.com.