Have You Outgrown Cash Basis Accounting? Here’s How to Switch to Accrual Basis.
Simple Doesn’t Always Mean Better
Your business is your baby. Like most long-time shop owners, you’ve poured hours of your time—blood, sweat, and tears—into growing your business. By now, you’re a pro at customer service and fixing cars, but you may still need a little help with accounting, especially if you currently use the cash basis method.
Cash basis accounting, or keeping track of your finances via checkbook and bank account, is the simplest method of accounting; money going into the bank counts as income, and money going out counts as an expense. And that’s all there is to it.
Or is it? As your business becomes more complex—you start growing your team, making larger parts orders, dealing with multiple vendors and suppliers, and taking on a higher volume of jobs—you’ll begin to notice that things don’t always align. There’s more money coming in, and there’s more money going out. It’s no longer as simple as, “I do a job, front the costs, get paid right then and there, and know exactly how much I made.”
One of the biggest problems with sticking to a cash basis method of accounting is that it becomes easy to forget about or ignore the expenses you haven’t paid yet. You might see that you have $30,000 in the bank and think, “Awesome! We’re doing great.” But a parts bill you forgot about is taken out of your account right when you’re about to process payroll, leaving you with far less profit than you thought. Now you’re not able to invest in that new bay you were going to buy this month.
If you’re not tracking your income and expenses as they happen, you really don’t know where you stand until everything hits your account, making it difficult to plan ahead.
Signs That You’ve Outgrown Cash Basis Accounting
- You experience big swings. One week, it seems like you’re making a ton of money, and the next week when payroll and bills hit, it seems like you’re taking a loss.
- You can’t identify where certain expenses came from, or why your income, expenses, and profits don’t add up.
- You forget about major payments before they hit your bank account.
- You want to invest more in your business by building your team, hiring vendors, and acquiring better technology.
Accrual Basis Accounting: Thinking in Terms of Cash Flow
The accrual basis method of accounting, or recording transactions instead of payments, will give you a clearer view of how much profit you're making at any given time. The goal is to have accurate numbers; you don’t want to be misled into believing that you have more or less money to work with than you actually have, or will have. With accrual basis accounting, your finances are balanced as soon as transactions take place.
So, how do you get there?
Minimize Variables
When you’re using cash basis accounting, and your numbers don’t add up, the question becomes, “What am I missing? Did I forget to count a payment? Was there theft?” These are the variables we want to minimize. You want to be confident that all major expenses are being accounted for, so if there is a big chunk of change missing, you’ll be able to quickly figure out what’s going on.
The way to minimize variables in accounting is to pay close attention to the income and expenses that make the biggest difference to your finances. Sure, you could dive into every single detail and penny spent, but for many shop owners, that’s overkill. It can take a lot of time out of your day to accrue every single expense, and a few bucks won’t overly affect your cash flow.
Think Big Picture
Accrual basis accounting is fairly easy to implement in the auto repair industry because there are only two major variables that we need to consider:
- Invoices
- Cost of Goods Sold
Invoices are the easiest place to start accruing your income. What matters most is when the job is done, complete, and set out. Whether it’s by day or by week, you want to make sure that invoices are all dated correctly. Instead of tracking when invoices are paid, you can now base your income outlook on when the transactions took place.
Next, you want to look at the cost of goods sold, which includes the price you pay for parts on each invoice. These figures make up your expenses. Instead of looking at your bank account and waiting for the money to be taken out, you now know how much you paid to complete each job as soon they are completed in your system.
Now, you may have terms with your parts supplier where you pay them at the end of every month. In this case, you may not need to date every single small parts order. Instead, you can keep an ongoing list of parts you’re buying from each major supplier so that you have a good idea of what your parts bill is going to look like before it comes time to pay.
What About Payroll?
You may notice that payroll is missing from the list above. Many shops don’t accrue payroll because it can get tricky. If you commission a large chunk of work, you may want to accrue that into your monthly finances so that you’re keeping track of it.
Eventually, you will probably want to accrue your payroll, too, so that you have the clearest idea possible of where your finances stand.
When you are confident about your cash flow and know approximately how much money you have on hand without guessing, you can do a lot more with your business: invest in new technology, give your team a nice bonus, open a new shop, or help your community.
How to Get Started With Accrual Basis Accounting
If you start by accruing the major items—invoices and cost of goods sold—you can get things rolling fairly quickly. Remember to date all transactions, and keep those payment dates as close as possible to the transaction date. Move the parts bill back to the date where the transaction actually happened, and you’ll start to gain a real-time idea of your finances.
Once you get the hang of dating transactions, you can become more sophisticated with accruing and feel more comfortable with how you’re spending money on your business.
Leverage Tekmetric’s Realtime Insights
Tekmetric’s shop management system makes it easy to track transactions in realtime. As jobs are completed, Tekmetric inputs all transaction information, including the price paid by the customer, the cost of goods sold, and the date of that transaction, into a variety of metrics that you can analyze. From end-of-day sales and end-of-month sales to gross profit percentage and gross profit dollars, Tekmetric makes it easier than ever to visualize the financial story of your business—anytime, anywhere.
This article was written with the guidance of automotive repair industry CPA Hunt Demarest of Paar, Melis, & Associates, P.C.
👉 Ready to grow your automotive business? [Book a personalized Tekmetric Demo Here]
FAQ
More articles
What is a mobile mechanic?
Unlike traditional auto shops, mobile mechanics travel to their customers to provide automotive repairs and services at the clients home. This service is attractive to older clients who may not want to travel as much or for young professionals who are to busy to wait for their car at a shop. Another major perk is that mobile mechanics can often perform services at a cheaper price because of having lower overhead costs.
Mobile mechanics are not able to perform every repair that a brick-and-mortar shop can as they have to transport all of their tools and supplies with them. However, they can still provide these common repair services:
- Oil changes
- Diagnostics
- Tire rotations/replacements
- Filter replacements
- Batteries
- Spark plugs
- Alternators
- Brake service and more.
How profitable is a mobile mechanic business?
Mechanics can charge whatever they would like but most repairs fall in the $20 - $125 per hour range. Like any business, you have to consider your startup costs, advertising expenses, number of expected clients, and how much your services are worth before determining if your business will be profitable. Overwhelmed yet? Dont worry, we will explain everything in detail below.
6 Steps to become a mobile mechanic
While you may not need a college degree to be a quality mechanic, you will still have to invest in tools, licensing, marketing and other business needs. We have outlined everything you need to start your business below.
Develop a Business plan
Starting with a quality business plan for your business is the first step in making sure you start off on the right foot. Outlining who your competitors are, setting goals and solidifying your financials may seem outdated but they are the foundations of your business. Here are nine steps to creating your business plan:
- Write an executive summary
- Describe your shop
- State your business goals
- Describe your products and services
- Do your market research
- Outline your marketing and sales plan
- Perform a business financial analysis
- Make financial projections
- Create a plan for growth and expansion
Gather necessary licenses and certifications
Once you have created your business plan, it is time to start working on your business license. Not every state requires you to acquire a license but some do. Do your research for the state you plan to work in and make sure you are legally ready to open your auto repair shop.
The most common certifications include:
- ASE certification: Also known as the National Institute for Automotive Service Excellence. Being one of the largest accreditation organizations, ASE is commonly recognized throughout the auto industry.
- Manufacturer certification: Mechanics may elect to gain additional certifications from specific manufacturers (Honda, Toyota, etc.) to add to their credibility. These certifications are also recommended if you only work on certain types of cars.
- Refrigerant certification: If you plan to work on MVAC (motor vehicle air conditioners), the EPA requires you to obtain certification in proper refrigerant handling according to Section 609 regulations from the Clean Air Act.
Also, don’t forget to register your business and form the appropriate legal entity (partnership, sole proprietorship, limited liability, or corporation). Each entity has pros and cons, so consult with a legal professional to make sure you are ready to file taxes with the IRS and open your own business.
Set your pricing structure
Your cost per hour or per repair should be reflective of your years of experience, geographical location, types of services performed and competition. Doing some competitor research will help you determine how much clients are willing to pay in your area.
Some mobile mechanics can charge more if they offer premium services or more complicated repairs. If you are new to the area, it may be beneficial to keep your costs low until you have a solid client base. Don’t forget that you can also make money off of part markups.
Lastly, remember to account for inflation, sales tax, parts, and gas for your vehicle. Depending on your payment options, you will also need to account for credit card processing fees. Auto repair can be a seasonal industry (especially in certain states), so make sure to stow away some revenue for slower months.
Insurance coverage
If you are going make an investment in your mobile auto repair business, you need to protect it with the proper insurance coverage. Some of the common insurance plans you should consider include:
- Liability insurance
- Comprehensive coverage
- Fire and theft insurance
- Road risks insurance
Lastly, decide if you will be offering any warranties on your services/parts and how that will impact your bottom line.
Invest in quality equipment
- Tools: A reliable power source, jack or portable car lift, drain pans, safety equipment, scanners, cleaning sprays, diagnostic equipment and gloves are all important to have on hand. Also, don’t forget a proper lighting source.
- Parts: Having commonly needed auto parts in your inventory will save you time rather than waiting for parts to be delivered to you. However, you should also determine how much inventory space you have and how to maximize it.
- Software: A cheat code for mobile mechanics is adding cloud-based auto repair software that can help you keep track of inventory, invoices, billing, inspections, marketing, and more all in one place.
- Vehicle: Reliable transportation is critical for mobile mechanics. Select a vehicle that has enough storage to accommodate large parts and good fuel economy for longer trips. Lastly, don’t forget to bring shelter in case of inclement weather so you can continue to work in the elements.
Tek-Tip: If you need help coming up with a mobile mechanic business name, we have developed a guide to the best auto repair business names. In addition, we developed an AI-powered name generator tool that can also help with logo creation.
Marketing and advertising
You can offer the best mobile mechanic service in your state but without a proper marketing strategy, customers may struggle to find you. Here are some common marketing efforts that will help you build a strong customer base.
- Website: A strong website is the glue that holds all of your marketing efforts together by providing a central location to find prices, services, phone number, and more. Make sure your website reflects what makes you better than your competition. SEO (search engine optimization) is another important factor to include in your website to ensure you are visible to those searching online for your services.
- Paid advertising: Strategize where your target audience is located and how you can leverage paid advertisements to attract more customers. Possible opportunities include Google ads, social media ads, local event sponsorship and more.
- Social media: Social media is a great place to highlight customer testimonials and engage with your audience. Experiment with varying content types until you find what resonates with your customers.
- Traditional marketing: Mailers, business cards, flyers, billboards and direct mail can all be impactful marketing tactics for local businesses. Considering adding a QR code pointing users to your website or adding coupons to incentivize customers.
- Referral program: Testimonials go a long way for word-of-mouth marketing. Consider offering a discount on future services for each new customer they refer to your business.
- Email: Email marketing is a great way to retain existing customers by offering incentives or coupons to ensure your car repair business stays top of mind. Another impactful email marketing tactic is to send oil change reminders to existing clients.
Closing Thoughts
Starting a mobile mechanic business can be intimidating but the flexible working hours, independence and profitability make it worthwhile. Being a small business owner is not for everyone, consider starting out as part time and move into full time as your profitability grows. Don’t forget to utilize your network to learn industry trends and new tactics to grow your business.
Shop Management
Thought Leadership
October 31, 2024
Starting a business can be a big risk. But if you map out a plan and execute it right, the outcome is well worth it. Having a solid automotive repair workshop business plan in place is especially important if you ever plan on owning multiple shops.
When you realized that you wanted to be a shop owner, it’s likely you considered the good you can do for both yourself and other people. Helping customers get their vehicles back on the road, and helping service advisors and mechanics grow in their careers is an exceptionally rewarding aspect of owning and operating a repair shop.
The truth is that estimates tie into professionalism. When the first oral surgeon gave you an estimate for your wisdom tooth removal surgery, they helped you:
- Manage your expectations: You knew what kind of procedure to expect, and how much you could expect to pay for it.
- See that the office cared about your wellbeing: The oral surgeon and their staff wanted you to make the best choice possible and gave you a resource to accomplish that.
- Have a reference point for the future if any issues come up: For example, if you got charged a couple of hundred dollars more after your procedure, you’d have documentation to show that the extra cost wasn’t part of the plan.
Wisdom tooth removal surgery isn’t cheap. Neither is auto repair work.
Just like a professional oral surgeon’s office explains to patients what their options are and how much they should expect to pay for procedures, a professional auto repair shop shows drivers what their repair work options are and how much they should expect to pay for repairs.
That professionalism is what helps you win over and retain more customers. If your customers are deciding between different auto repair shops, they’ll likely stick with the business that shows the most professionalism.
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