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12 Deadly Sins: Mistakes that kill profit and lifelong success for auto shops

Editor’s note: Hunt Demarest is a CPA/ABV with Paar Melis and Associates, accountants specializing in automotive repair shops

Our clients have taught us a lot about what it takes to become a successful shop, but we also see a number of things that hurt shops

By working with automotive repair shops all across the country, we have a unique perspective of the inner workings of most shops. Our clients have taught us a lot about what it takes to become a successful shop, but we also see a number of things that hurt shops.

Hunt Demarest, Paar Melis and Associates

The following is a list that we have put together of the 12 Deadly Sins that are killing profit and lifelong success for auto repair shops.

1. Your Point of Sale Doesn’t Match Your QuickBooks

This is one of the first items that we check when we get a new client and we often find the two don’t jive. You are asking your service writer or your estimator to get a certain target gross profit percentage in different categories, but what if the numbers they are looking at are not correct?

If your front counter person thinks they are getting an average of 50% GP on work, but QuickBooks is only showing 40%, which number is correct? The POS software is showing what you think you are making, versus QuickBooks showing what you actually received and actually paid out to vendors or employees.

The major differences that we see for labor margins are that most POS do not factor in inefficiencies of techs or added costs to their hourly rates or bonuses. The major differences that we see for parts margins is cores and credits not being received or sent back, parts going on customer cars and not getting billed, and even parts walking out the back door.

Unless you can get both softwares to match and be accurate, how can you ask your service advisor or estimator to improve the margins?

2. Your Portal Doesn’t Match Your QuickBooks

A lot of our clients use coaching companies to help them improve their processes, procedures and profitability. All of these coaching companies use a Portal where our clients enter their metrics so that their coach can help them improve.

As mentioned above, if your QuickBooks doesn’t match your POS, it isn’t going to match your Portal because the majority of the information is coming right out of your POS. If your coach isn’t seeing what the actual numbers are, how are they supposed to help you improve them?

3. You Aren’t Looking at Your Financials Often — or Ever

Over the years one thing that we hear a lot is that our clients do not like looking at their financials. They say, “That is why we have an accountant!” However, at the end of the day, accountants come and go, and this is your business.

You need to take responsibility for your business and look at the numbers to see where it went right or wrong. This is even more important when you have a shop owner that wants to take a lesser role in the day‐to‐day operations.

The financials will be your lifeline to see how the shop is doing when you are not there. If you feel that you don’t understand what to look for or where to look, that leads us to our next sin …

4. You Aren’t Questioning What You Don’t Understand About Your Financials

Don’t understand how you had a great month sales‐wise, but the bank account looks worse than when you started? Don’t understand even where to look to get this information?

Ask your accountant! Accountants are unlike shop owners as we do not have a product to sell. We are selling our expertise, our knowledge, and our guidance. If you are not questioning your accountant to better understand your numbers, then you are not getting the value of their services.

An accountant should be able to tell you three things: how much you made, where that money went, and how to keep more of that money in your pocket. A good accountant will give you the financials, but a GREAT accountant will educate you on the financials. A great accountant is invested in their clients’ business because we succeed when our clients succeed.

5. You Think Tax Planning Starts and Ends on April 15th

Too many times we get new clients after they have received the dreaded April 14th surprise from their old accountant: “You owe a big tax bill and you need to pay it ASAP.”

Unexpected expenditures are the main killer to any small business, and unexpected taxes are the worst because the government always gets their money. We are known to be pretty aggressive in our tax positions because at the end of the day, we have the same objective as you: Pay the least amount of tax legally possible utilizing any avenues that keep more money in your pocket and lead to your longterm success.

However, there is only so much that we can do after the year is over. All our monthly clients know how much tax they are going to owe by fall time. We do a full tax estimate that incorporates their payroll, their business, and any deductions for the year so that we have a complete picture.

Once we know how much they are going to owe (or get back) we talk about tax planning, tax minimization, and possibly budgeting for the upcoming balance due. Some very successful businesses are going to owe tax, and there is no way to get around that.

However, if you know that you are going to owe a $20k tax bill in 6 months, you will make very different decisions on how you run your business and your personal life. Tax planning needs to be done proactively, not retroactively.

6. You Aren’t Planning Your Own Retirement

“My business is my retirement.” This is a statement that we hear far too often from shop owners. In reality, your business is probably worth much less than you would like, and it will not provide sufficient cash on its own to fund your retirement.

Shops are sold based on money available to the owner and a multiple of 2.5‐3 times your average annual take home amount. This means that if you were to strip down the business and take all the cash out that is possible, the value of your business is worth 3 times this amount on the high end. You know what your business makes — do you think that you could live through retirement off 3 times that number?

Probably not. The single best deduction that a business owner can take is contributing to a retirement account. It is a 100% deductible expense by contributing, and it is tax deferred while the asset grows to your full retirement age.

We are known to be aggressive in our tax planning and interpretations, but I will not talk about any sort of creative deductions until your retirement contribution is maxed out for the year. There is nothing else out there that you can get a full deduction for putting money in your own pocket.

7. You Aren’t Paying Yourself Proper Rent

In a perfect world, the real estate that your business uses is owned outside of your operating entity and ideally it is owned by a separate LLC. We won’t get into the deeper reasons of this structure right now, but the short answer is it provides legal protection in case something goes wrong.

However, by owning the real estate outside of the operating entity, you will need to pay yourself rent so that you can cover the cost of the mortgage, taxes, etc. Most shops that are setup like this and have a mortgage on the property “pay themselves” by classifying the mortgage payments as rental expense on the business, and rental income on their rental.

Some shops that don’t have a mortgage are paying themselves little to no rent at all since the real estate doesn’t require cash to operate because the shop is shouldering the burden of expenses. What we need to do is strip out the related party idea and find out what is fair market value for the real estate. In other words, what would you charge someone else if they were renting this space from you? By doing this we are setting your business up to be self sufficient.

Let’s look at an example: You pay yourself $2,000/month in rent and you decide to sell your shop. The shop is profitable, but not overly profitable. It is making a decent return. The new buyer does not have the cash to purchase the real estate but instead wants to rent from you until he can get the capital needed to purchase the building. Are you going to charge them the same amount that you have been paying? If you are at fair market value, then you are fine. However, if fair market value is $5,000/month then that is more likely the amount you would propose.

Is the $3,000/month extra expenses going to be sustainable for the shop for the new owner? No one knows because you do not have a track record to prove that the shop can handle this. On the other hand, if you had been paying yourself fair market value rent for the last 3 years you have deliverable results that you can show the new buyer that it can be done, and it can be done while still remaining profitable. You need to set your business up to make a profit while at the same time set your business up to sell.

8. You Aren’t Paying Yourself Correct Wages

One of the benefits of being self‐employed is that you determine how much you are going to make on payroll. Just starting out in your shop, you were probably the last person to get paid. As the years go on you increase your salary because the business is growing and becoming more successful.

However, as the wages increase, so do your payroll taxes, which means less money in your pocket. If you go the other direction and try to work the system by paying yourself little to no wages, you are saving payroll taxes, but you are putting yourself in a bad situation for multiple reasons.

If you pay yourself low to no wages, you are putting yourself at risk with the IRS because you are not paying yourself “fair and reasonable” wages for your services. You are also not contributing enough to social security, so your future benefits are being diminished.

If you are paying yourself too high of wages, you are throwing money away because you are paying excess payroll taxes that could be in your pocket and not Uncle Sam’s.

The happy medium is right in the middle and for most shop owners, we find that to be around $60,000 — $65,000/ year.

9. You Aren’t Paying Your Kids

Did you know that the standard deduction is now $13,850/year? That means that if someone earns less than $13,850 they pay no federal income taxes. This creates a great tax planning opportunity to think about putting your kids on payroll.

Paying your kids needs to still pass the “fair and reasonable” test like all business expenses, but there are a lot of ways our clients use this to their advantage.

Say your kid is in college and you are paying them to be there (housing, food, etc). You are using after‐tax dollars to pay all of this. What if you hired them to be your social media manager, which plenty of people do remotely. Now by paying them $1,000/month, you are giving your business a full write off, and this is income tax free for the child. What you have done is made their college expenses a business tax write off. There are some other factors to look into, but you can see the potential tax savings.

10. You Aren’t Funding Your HSA

In the new age of health insurance plans, a popular option is what is called a “high deductible health care plan.” The general idea is that the deductible (money that you pay out of pocket before insurance kicks in), is high so that the monthly premiums are lower.

This is okay if you do not have a lot of healthcare costs, but if you do it can quickly get expensive. What a lot of plans offer is a HSA, or Health Savings Account, to go along with these high deductible plans. A HSA allows you to contribute pre‐tax dollars to the account to use for healthcare related costs. Medicine, doctor visits, surgery, and even sometimes things like therapeutic massage, chiropractic, and saunas are acceptable costs if the doctor recommends.

For example, if you want to pay a $75 doctor bill without an HSA you would have to make $100 in wages to get the $75 in after tax dollars. However, if you are using your HSA you could just contribute the $75 pre‐tax and save the $25 that you would have spent on payroll and income taxes. You can imagine the savings for larger expenses.

I recommend that all my clients check with their insurance agent to see if their plan is eligible and set one up. Even if you put $100 in it right now, you can decide to contribute more later if you have a medical expense come up. However, if you suddenly have an unexpected large medical bill, and then choose to open the HSA, it is too late because the account has to be open before the medical expense is incurred.

The annual limit is $3,850 for individuals and 7,300 for families. Any amount unused can be carried forward for years and used later for future medical expenses or converted into a retirement account as well. This is a great deduction that a lot of people overlook and could be costing you money right now.

11. You Have No Emergency Plan

No one likes to think about it, but something can happen to you at any time. Is your business setup properly to handle something like this?

A lot of our clients have life insurance (if you don’t, you really should get some asap), but what about an accident that leaves you unable to go to the shop, sign checks, etc? You need to have procedures in place so that if something does happen to you, there is someone that can step up and continue operations. Who is going to sign the paychecks? Who is going to run the payroll? Who is going to pay the sales tax?

All of these things that you are assuming responsibility for just stop if you are the only one with the access or ability to do so. Keep in mind that these all must be in place before something happens, or it becomes very difficult.

We had a client that was out of town for vacation and had a stroke. He was not able to communicate and there was no one else at the shop that had permission to sign the checks. His nephew went to the bank to tell them the situation and ask that he be added as a temporary signee, but the bank froze all the accounts in fear of fraud. They were eventually able to get it straightened out, but not before a couple weeks of complete confusion and frustration. So how can this be done? You can talk to your bank about adding an emergency signee in case an unexpected situation arises.

You can save all your access codes and instructions somewhere so that they are written down in one place, and someone could step in and continue operations. You can leave all this information with your lawyer so that they could act on your behalf in the interim. T

here are a lot of choices to be made, but you need to do it before you need it. Hopefully it never comes to fruition, but wouldn’t you like to be prepared if something does happen?

12. You Don’t Have Proper Employment Insurance

This is a severely overlooked area for a lot of small businesses. When we talk about employment insurance, we don’t mean health or disability insurance. We mean insurance related to liability from hiring and firing issues.

Have you ever had to fire an employee? What if that employee felt that he or she was not terminated for just cause? What happens if he or she felt that they were discriminated against? A shop is a very different environment than most other businesses and incidents do happen.

Female service advisors that have issues with male technicians hire a lawyer because they felt they were in a workplace with harassment. Technicians with drug or alcohol problems that felt they were discriminated against because they had a disease and are a protected group. It all can happen, and if they decide to sue you, you could be in a very bad position.

This is something that you need to talk with your insurance agent to see if you are covered for these situations. In most cases, $1M of liability coverage for employment related suits will cost you about $1,000/year. A very small price to pay for peace of mind that you are covered from something like this.

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