Previously I spoke about how collision repair operators will have to develop new core competencies in order to compete against the increasing competitive pressures as a result of industry consolidation. As we saw last week, consolidation is a trend that is not going away, and most likely will continue in frequency and intensity. Collision repair is no longer just about fixing cars and minding KPI’s.
In business school we talked a lot about core competencies. The most basic definition of a core competency is something a business is really good at. In collision repair, most operators would have a core competency in vehicle repair and customer service.
In fact, we may actually be too good at those things. The reality is the vast majority of owners in the industry are owner/operators. And even those owners who have done an excellent job of firing themselves to work on the business rather than in the business, most owners started in the business in some sort of operational role.
It is a prerequisite that to be successful in this industry you must drive excellence in the day to day operations of running a business, managing customer service, meeting insurance requirements, and fixing a car properly. Unfortunately, what I often seen in this industry is an exclusive focus on operations to the complete detriment or sometimes even complete exclusion of the other incredibly important aspects of a business.
When I was in business school we were required, regardless of our specialization, to take core courses in Marketing, IT, Human Resources & Management, Accounting, Finance and Operations. These were non-negotiable and failure to pass these programs meant failure to obtain your degree.
At the time I was incredibly frustrated that I had to sit through a three hour lecture on network effects from my condescending IT professor. What I learned, however, was that these topics formed the pillars of any modern business. I specialized in finance and M&A – at the time all I cared about was learning how to make a lot of money. But I quickly learned the companies making a lot of money spent a lot of time focused on these topics. While not every Fortune 500 company was an expert in all of those core areas, every single one of them had executives that reported directly to the CEO responsible for those areas.
Now I am not suggesting that in order to be successful you immediately go out and hire someone to manage each one of those core categories, nor would I expect you to. But I can assure you that the top companies in our industry all have an executive at some level that is responsible for each one of those functions. If you are not actively managing each one of those functions, you are falling behind.
A particularly weak area in the industry that I see continually overlooked or brushed to the side as nonessential is finance. People often confuse finance with accounting (they are both frequently brushed aside). Finance is the exercise of managing the capital of the business and projecting the future financial state of the business to manage risk and ensure successful growth whereas accounting is merely measuring what already happened. Accounting is backwards looking whereas finance is forwards looking.
The reason finance is so critically important is that it is impossible to grow systematically without it. That is not to say you cannot grow without finance, but if you have any desire to grow in a systematic and predictable way you must have finance. Finance allows you the ability to predict cash flows, to ensure that you have access to the lowest cost of capital, to manage and minimize your risk and to maximize your enterprise value. In other words, if you want to grow, and still make money while you grow, finance allows you to do that.
A significant reason the large MSO’s have grown at such a rapid pace is because one of their core competencies is financial management. In fact, one of the key reasons to take on a financial sponsor (i.e. private equity firm) is to have access to those financial core competencies. A private equity group is not able to tell you how to better manage your business (that is what the management team is for). Rather, they are they to provide financial expertise and growth capital in an effort to supercharge the growth of the business.
A financial core competency is not just about growing either. A track record of building solid financial models used for budgeting reasons, managing the business based on those models and showing where you exceeded or fell short of goals will go a long way in increasing the value and transparency of your business to many stakeholders. Your business will be more attractive and more valuable not only will you demonstrate professionalism and a track record of success. If you are looking to grow, it is attractive to potential financial partners, banks, vendors, employees, and strategic customers. If you are looking to sell it is also attractive because increased financial transparency decreases the risk to the buyer. The less risky you are the more valuable you are.
Regardless of whether you intend to stand pat, grow or sell, developing a financial core competency is essential. Finance is about forward looking projections, budgeting, and capital management whereas accounting looks at what already happened. The foundation of financial management is accurate and detailed accounting but they are not the same.
As always, if you would like to discuss any of these strategies in more depth please shoot me an email via my contact page to discuss further. I find all of these business themes fascinating.
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Until next week.