Financial Controls in Automotive Repair

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Managing an automotive repair business – like any small business – will require some degree of control on finances. It’s not necessary to have an in depth understanding of accounting to so this as a good deal of financial management can be accomplished using simple spreadsheets. Controls applied in a business environment are based on measurements. And measurements in this case are derived from financial information. A business that applies financial controls will have an advantage over competitors that don’t. Following are areas to which financial controls can be applied:

 

  1. Budget Management – Budgeting can be a tedious process but it really only needs to be performed once a year or maybe updated once a quarter. At the very least going through the process of defining areas of expenditure will help to identify where money is being spent. In an automotive repair shop there are direct costs (those that are directly related to the repair process) and indirect costs such as marketing. Direct costs mostly consist of parts and labor. Controlling these costs is essential to ensuring profitability. Indirect costs should be managed as well. They must generate a positive return on investment in order to be worthwhile.
  2. Asset Management – An auto repair shop makes investments in many assets. Primarily these investments come in the form of equipment. In order to manage assets the revenue they generate must be recognized. Recognizing the revenue generated – the effectiveness of the investment can be measured in terms of breakeven point and return on investment (ROI). The breakeven point is the point at which the revenue generated meets the cost of the asset. ROI is measured by dividing the revenue generated by the cost of the asset. The ROI over the life of the asset indicates the effectiveness of the asset.
  3. Financial Statement Management – There are 2 primary financial statements produced by accounting systems. The balance sheet and the profit and loss (P&L) statement. Often these financials are left to the accountant to assess but it’s best to know the basics of how to read and interpret them. The balance sheet can be viewed of a summary of assets and liabilities. Assets can be viewed as value in a positive light. However, they can also be subject to taxation increasing operating expenses. Liabilities are generally money owed. Money owed to vendors for operational costs (such as parts) as considered short term or current liabilities while loans are considered long term liabilities. An example of measuring the relationship between assets and liabilities is the Quick Ratio. This ratio is determined by dividing the quick assets (cash in bank, accounts receivable) by current liabilities. A low quick ratio may mean that the company could have trouble paying its bills.
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