Cash flow is the life blood of all small businesses. Without cash, it’s hard to purchase inventory, pay employees, and ultimately keep the doors open. However, it can be tricky to manage for certain types of small businesses: for example, if your business is seasonal, if you get paid on invoices, or if you have to make a lot of upfront investments in expensive equipment or inventory. For all these reasons, managing cash flow for auto repair shops can be a bit of a balancing act.
Read on to learn more about the top three cash flow challenges you face as an auto repair shop and how to address them.
What is cash flow, exactly?
Essentially, your cash flow is your current assets minus your current liabilities. Current assets are defined as things like your cash in the bank, your current Accounts Receivable, your inventory, your business location (if you own it), and any equipment or other asset you may have to facilitate doing business. Your liabilities are usually defined as your current Accounts Payable and any long-term payables you might have. A business loan, line of credit, or other business debt would be included in this number.
Basically, if your expenses exceed your income, then you have a cash flow problem. However, there is a specific calculation you can do to get a more detailed picture of your cash flow health: your cash flow metric.
To get your cash flow metric, divide the value of your current liabilities into your current assets, and you’ll come up with your cash flow ratio. You should aim for a 2:1, though this can be difficult for small business owners to achieve. However, if your ratio drops below 1:1, it’s costing you more money to do business than you’re bringing in and can be a red flag.
Check out “Cash Flow: What Business Owners Should Know” to learn more about your cash flow metric.
Cash flow challenge #1: Longer payback periods
As you might expect, one of the key steps to managing your cash flow is making sure you’re paid in a timely fashion for your services. For auto repair shops, this can be a complicated area to manage. Many of your customers likely use their car insurance to pay for repairs, which can delay when you get paid as you have to wait for insurance to reimburse for the repair. You also may accept payments by invoice from customers for larger bills, or even offer financing terms to your customers. All of these payment options add time between when you complete the service and get paid.
When looking at your annual budget, be sure to pad in plenty of time between when you complete the repair or service, and when the payment for the service will actually hit your bank account. You may also want to consider getting a revolving line of credit that you can draw upon to bridge cash flow gaps.
Here are a few more tips to make your invoicing and payment process less of a drag on your monthly cash flow:
- Partnering with one car insurance company as their “preferred” service provider can give you a steady stream of customers. It can also help you smooth out your cash flow, as the insurer will pay you directly for your services provided (rather than a one-off reimbursement through the customer).
- Accept as many forms of payment as you can afford to make it easier for your customers to pay you. Use a point of sale system to take credit cards, for example, and offer invoicing as a payment option.
- You may also want to consider offering financing options to your customers to pay for larger repairs. Some shops partner with credit card or personal loan companies to help customers cover the upfront cost of a repair.
Cash flow challenge #2: upfront costs of doing business
Another factor affecting your cash flow when you own an auto repair shop is managing the rather steep upfront costs of doing business. Typically, you’ll pay your skilled technicians for completing a job and order necessary car parts long before the customer payment for the service hits your bank account. This can leave you with cash flow gaps that you need to bridge.
When you plan your budget for the year, be sure to account for these upfront costs. To help reduce these costs, you could also consider buying commonly used replacement parts and other tools in bulk at a discount to have in stock when you need them. A short-term business loan can be helpful to cover the upfront investment in inventory, which you then pay off as you receive customer payments.
Cash flow challenge #3: busy and slow periods
Like many other businesses, auto repair shops tend to have “busy” and “slow” seasons. You’re likely very busy during summer road trip season, while you may struggle to fill your shop bays during the holiday season (depending the region of the country your shop is located in). To manage the highs and lows, some planning is needed to make sure you have enough technicians on staff and cash on hand.
If you’ve been in business for a few years, you can compare previous year’s business performance to help you forecast when you’ll need to keep extra cash on hand to bridge a slow month. If you’re a newer business, do some research on industry trends to figure out when you need to plan for slow months.
Once you’ve identified your slower months, think about if there are other services you can offer to keep business rolling in during those months. For example, can you expand your services to include oil changes, detailing or state inspections? You can also look into partnering with car insurance agencies to become a preferred service provider.
It can also be helpful to keep a line of credit open to use during your slower months, in addition to putting extra cash aside for those slow periods.
Check out “Stay Cash Flow Positive Through Your Slow Season” for more tips on how to address seasonal business finances.
While managing cash flow for auto repair shops can be tricky, you do have options. Learn more about financing options for your auto repair shop.