Why Smart Cash Management is the Key to Your Shop’s Success
As the holiday season winds down, many auto repair shop owners reflect on their year and plan for the next. One critical area that often gets overlooked is cash management. In this week’s episode of Business by the Numbers, Hunt Demarest, CPA, shares why maintaining healthy cash reserves is essential for your shop’s financial stability and how to avoid the most common cashflow mistakes. This blog is based on episode 150 of Business by the Numbers.
What Are Cash Reserves, and Why Do They Matter?
Cash reserves aren’t just extra money sitting in your bank account—they’re your safety net. These funds help you cover unexpected expenses, weather slow months, and avoid hasty financial decisions that can hurt your business.
Think of cash reserves as your business’s emergency fund. Without them, even a profitable shop can run into trouble when faced with unexpected costs, delayed payments, or seasonal slowdowns.
How Much Cash Should Your Shop Keep in Reserves?
Determining the right amount of cash to keep in reserves depends on your shop’s unique circumstances. A general rule of thumb is to aim for three to six months of operating expenses. For a quick calculation, you can also target one to two months of monthly sales, which often aligns closely with your operating costs.
- Consistent businesses: If your shop has steady, predictable income and expenses, you might manage with a smaller reserve.
- Seasonal or fluctuating businesses: If your revenue is inconsistent, you’ll need higher reserves to handle the ups and downs.
If you’re unsure how much to save, start by tracking your expenses and monthly sales. This will give you a clearer picture of your shop’s financial needs.
Common Mistakes in Cash Management
Many shop owners unintentionally sabotage their financial stability by mismanaging cash. Here are three common mistakes Hunt highlighted in the podcast:
- Draining the Business for Personal Use
It’s tempting to take more money out of the business to improve your lifestyle, but this often leaves the shop underfunded. Many owners live beyond what their shop’s profitability can support, which leads to cash shortages.Successful shop owners draw only what they need and reinvest the rest in their business or reserves.
- Keeping Too Much Cash in Checking Accounts
While it’s essential to maintain reserves, keeping excess cash in a standard checking account isn’t the best strategy. Inflation erodes the value of your money over time. Instead, use high-interest savings accounts or money market accounts to earn a return on your reserves. - Rushing to Pay Off Debt
Many shop owners want to eliminate debt as quickly as possible, especially after tough financial years. While this is admirable, prioritizing debt over reserves can leave you vulnerable to future cashflow problems.Build your reserves first, and then create a realistic plan to pay down debt over time.
Why Cashflow Stability Matters
Cash reserves are about more than just financial security—they also give you the flexibility to make smarter business decisions. When you’re not constantly worried about cashflow, you can focus on long-term growth, invest in your shop, and take advantage of opportunities as they arise.
Without reserves, cashflow crises can force you to make reactive decisions, such as discounting services or cutting costs in ways that harm your business.
Pro Tips for Auto Repair Shops
- Separate personal and business finances: Keep your lifestyle in check to avoid draining your shop’s resources.
- Use interest-bearing accounts: Earn a return on your reserves to offset inflation.
- Regularly review your finances: Track your cashflow, operating expenses, and reserve levels to ensure you’re on the right track.
By managing your cash wisely, you can position your auto repair shop for long-term success and avoid the stress of financial instability.