No one likes talking about cash flow, but when it comes to running a diesel repair shop, cash flow conversations are a must. During a survey HHP conducted with nationwide repair shops, managing profitability and cash flow were the most popular concerns cited by repair shop owners and managers. Considering the costs of doing business are continuing to increase, and customers are more informed than ever when it comes to pricing repairs, its incredibly difficult for repair shops to maintain profitability and cash flows, let alone increase them.
So, how can you work around the challenges of todays repair shop? The secret to improving despite a tough market is to take control of the controllables, and one of those controllables is receivable collection times. With the impact receivables have on a diesel repair shop, its extremely important to manage collections when working to increase profitability and cash flow.
Know your Number: Days Sales Outstanding (DSO)
The first step in getting paid faster is knowing your repair shops Days Sales Outstanding (DSO), or the average age of receivables. Days Sales Outstanding is typically calculated month to month, or period to period (such as quarter to quarter); the key is to remain consistent in how you calculate it. Simply stated, the higher the DSO number, the more operating capital you need to run the shop and the more likely you are to struggle with cash flow.
Before you scramble to get your DSO to zero, its best to baseline your repair shop to know where you currently stand. Calculating your Days Sales Outstanding (DSO) is easy and can be done using the formula below:
Days Sales Outstanding (DSO):
[Accounts Receivable at the End of the Period]
[Total Credit Sales] x [Number of Days in the Period]
For example, Steves Repair Shop started with $500 in receivables in January. Throughout January, another $400 in credit sales were made, raising the accounts receivables to $900. Payments were also made during the month, totalling $300 in payments received on credit sales. By the end of January, the accounts receivables is $600.
Heres how to calculate Steves Repair Shop DSO:
$600 (Accounts Receivable at the end of January)
$400 (Total Credit Sales) x 31 (Number of Days in the Period)
Steve's Repair Shop Days Sales Outstanding is 47.
5 ways to Reduce your Collection Times and Get Paid Faster
Any business improvement can be achieved in three steps: (1) set a goal, (2) track performance, and (3) monitor variance. As you work towards improving repair shop collection times, be sure to know your baseline performance and always have a goal for improvement. You can adjust your goals yearly, quarterly, monthly, etc., all that matters is the goal is being tracked and the variance to goal is being monitored.
Lightning Fast Billing
Simply stated, the longer it takes for a customer to get an invoice, the long it takes your repair shop to get your cash. The first step in improving collection times is to improve billing times. Start by baselining your current billing times, and brainstorm on ways to improve. For example, why wait to send a customer a bill? Why not collect right at the time of service or delivery? By skipping the post office, your invoice lands in the hands of the customer 3-4 days faster. And, requesting payment upon delivery of the repaired vehicle reduces both billing and collection times, by holding onto collateral while waiting for payment.
Incentivize Speedy Payments
The fastest way to get speedy payment is to incentivize speedy payment. One way to incentivize is to simplify the payment as much as possible. For example, keep a credit card on file so a customer can easily pay for any repair without having to provide their information each time you need it. Be sure to verify the card information each time the customer is in or on the phone, and be extremely careful in the keeping of customer information. This includes storing credit card information in encrypted file formats, and securely destroying any written information. Another way to incentivize speedy payments is by using terms. Popular terms include net 30 or net 60 terms, and some agreements contain a policy such as 5% 15, net 30 which means the customer gets a 5% discount if full payment is made within 15 days of receipt of services and that full payment is required within 30 days. In addition to offering incentives for early payment, you can include penalties for late payments.
Don't Be Afraid to Request
Your repair shop will never reduce payment times if you dont request payment. While it may seem like pestering, clients typically respect companies that recognize the need for cash and press for collection. Reminding customers that their payment is due the next week while checking in on the repair isnt a sign of desperation, rather, its a signal of a well-run company. Just remember to stay professional and dont get emotional with customers that give you a hard time- save the badgering or debt-collector tactics for the firms that specialize in them.
Once payment is late, dont wait.
Countless studies have shown the longer a business waits to collect, the harder it is to get paid. Set up a system to remind you of late payments the day they happen, and be sure to call the customer the same day. Start with a gentle reminder that the payment is past due, then increase the frequency and pressure of the reminder as time goes on. Typically late payment is an honest mistake and a reminder is sufficient to prompt customers to pay.
Let go of the stragglers.
An uncomfortable fact of business is that sometimes customers need to be fired. Simply stated, a client that doesnt pay their bill isnt a client, they are a collection problem. The key in the decision to fire a customer is a matter of costing; how much is keeping the client costing your business? For example if your average Days Sales Outstanding (DSO) is 36, and you have a low-paying customer with an average payment coming in 65 days after invoicing, you may need to consider cutting them loose. Simply stated, if all of your customers were like your low-paying customer itd be difficult to stay in business when youve got your own set of bills to pay.
Taking control of your receivables is the quickest way to gain control over cash flows. For more exclusive content on how to grow your business, join the HHP Repair Shop Value Program and take advantage of perks including exclusive pricing, lines of credit, and waived core charges. Click here for more information and to join the free program.