Setting up an income statement for your auto body shop

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Creating a profit and loss (P&L) statement for a body shop can seem tedious, but once an owner understands a few key strategies, it becomes simple and then allows management to focus on managing the company.

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To prepare the income statement, it is important to understand the different types of expenses and their place in the financial statement. Knowing the difference between cost of goods sold (COGS) and overhead is important for body shop owners because it gives them the ability to create an accurate and precise income statement.

For many reasons, it is necessary to have a clear presentation of the company’s P&L. It gives management and ownership the financial performance roadmap and helps to understand the financial health of the business. Additionally, understanding the chart of accounts helps create an accurate income statement. The chart of accounts is basically the buckets or categories where expenses are assigned. For example, a technician’s salary expenses are separated from purchased office supplies so that management can properly review expenses. A high-level look at the business separates COGS from overhead. All invoices/invoices are either keyed or coded into one of these two categories. A little later, we will go further and detail these two general categories.

COGS

The first set of expenses we will discuss is COGS. These are expenses that are associated with the repair of the vehicle.

When a vehicle is dropped off at a repair center, an estimate or repair order is created in the operating/estimate system (Mitchell, CCC, etc.) to schedule the repair. When making decisions such as replacing a part or repairing damage, you choose a revenue category: labor, parts, paint and materials, and so on. You order the parts or assign labor hours based on that decision, and the repair begins. .

Expenses are evenly split between categories – labor, parts, paint and materials, etc. Typically, at the end of the month, sales and costs are exported to the accounting system (Quickbooks, Xero, etc.), where sales and some repair order costs are taken into account. Any expense that is part of the repair should be classified as a COGS item. A rule of thumb is to add an expense category for each sales category. So if you have labor, parts, paint, sublease, and towing sales, the P&L should have those exact expense categories as well. Let’s see what a suggested P&L should look like.

PL

We’ll start with the sales categories. Sales must be broken down into a minimum of six different categories: labor, parts, paint and materials, sublease, towing and other. It should look like Figure 1.

Figure 1

This is an example of a standard collision P&L. Management can add or remove any category it chooses. All estimating systems have the ability to categorize sales and expenses; however, the owner decides if they want them mapped. Within each sales category, there are sub-categories, but they do not need to be broken down on the income statement. Having too many rows would be useless for the format of an income statement. An example of detail in each sale item is Figure 2.

Figure 2

This should cover most general ledger accounts that a body shop P&L should contain. However, management can choose what information it wants to include in the financial statements.

Now that we’ve covered the selling categories, we can dive into the COGS that come with them. As mentioned above, COGS are expenses directly associated with sales. For example, if 10 hours of labor sales are assigned to the estimate, the reverse of those sales should show the shop cost for those 10 hours. The same goes for parts. If there is a sale for an original equipment manufacturer (OEM) part, there should be a cost for that OEM part. A simple way to understand this is: if the expense is a direct cost to perform the repair, it is a COGS expense. This way, management can understand where the store is making money and where there are opportunities to make more. An example of COGS on a body shop P&L looks like picture 3.

picture 3

Just like sales, each cost category contains subcategories that make up the overall spend. A more detailed account of expenses that fall into COGS categories may look like Figure 4.

Figure 4

If you compare sales and expense categories side-by-side, you’ll see that each sales category is directly related to an expense. This gives owners and management an easy way to review and report profitability by sales categories and provides a track record of the financial health of repairs performed in the shop. If you know what profit margins you want to make, it quickly shows where the store is making a profit and where more can be made (Figure 5). You can quickly analyze sales and costs and how much money you make by repairing vehicles.

Figure 5

It is important that we do not want to blur gross profit margins by allocating overhead to COGS compartments on the P&L. As a reminder, overhead costs are things like rent, customer service representative (CSR) or manager compensation, utility bill, estimating system, etc. Think of them as expenses you would have even if you weren’t fixing a vehicle.

We explained COGS and how they should land on financial statements. In addition to having sales and cost of goods sold mapped or coded correctly, it is also important to code your overhead costs correctly. Creating specific general ledger accounts for expenses allows expenses to be categorized into “groups”. This is done in the accounting system used by the store, not in the estimate system like we did for sales and some COGS accounts.

Air

Now we need to enter all the other expenses that are necessary to run the business, i.e. overhead (also known as operating expenses). There are various other expenses that each store will have. There is no established method for titling these expenses; instead, you just have to follow the industry standard. Some stores will have very few and others will have many expense categories; either is correct. Figure 6 is a basic example of what the overhead categorization looks like on a P&L.

Figure 6

Overhead includes payroll and benefits for all employees not directly repairing the vehicle, building related expenses such as rent/taxes/utilities/building maintenance, office supplies and workshops, advertising, meals, uniforms, etc. is necessary to pay these expenses, they are not related to the actual repair of the vehicle. We have to pay rent and utilities to have a place to repair the vehicles, but we do not charge these expenses to our customers/insurance companies and make no money on these items. Generally, if the expense does not somehow “touch” the vehicle, it is overhead. For example, parts, paint, and materials go on the vehicle, technicians repair the vehicle, and sublease and towing providers are all involved in the repair. Thus, we refer to these expenses as being associated with running a business that cannot be linked to the creation or production of the repaired vehicle.

Summary

The sum of all reported information should be an easy and user-friendly P&L statement for any body shop owner to follow. A standard example of what a P&L should look like is Picture 7.

It’s a simple and straightforward way to report on the body shop’s financial health. It clearly shows sales, COGS, overhead and profitability. With this monthly information, owners and management can understand sales, how much money is going out, and how much they are earning. With clean P&Ls, identifying leaks is a breeze. It empowers owners and management to make better business decisions and recognize opportunities.

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