It’s all about profits, right? You can’t survive in this industry unless you mercilessly watch your profit margins. Parts margin, paint margin, labor margin, gross profit margin, overhead expenses, the list goes on and on.
But what if I told you that the big boys don’t care about their margins?
(Well the do, but just not the same way you or I do).
I’m sure you’ve heard it before. How can Caliber, Boyd, Gerber, Sevice King, ABRA, etc. stay in business at those labor rates?
The truth is, from an investor standpoint, profitability isn’t nearly as important as cash flow. But aren’t they the same thing, you ask?
To illustrate, I’ll share a conversation I recently had with an owner of a large collision repair business. The business generates over $5 million a year in revenue and they recently expanded to a second location to handle the growth.
In order to expand to the second location the owner had to take on some debt. As a prudent owner, he had his accountant draw up projected profit and loss statements to account for the additional expense prior to closing.
Everything looked good. Until he closed.
Almost immediately he noticed a big problem. Both locations were profitable but his bank account was constantly under pressure. Sales were increasing, profits were increasing, but his bank account was perilously shrinking. How is this possible he frantically thought?
He missed judged the difference between profitability and cash flow. The extra principal payment he was required to make every month was burning through his cash. And since principal repayment isn’t an expense, it never showed up on his profit and loss statement.
More often in small businesses, the business may show a profit, but the owner doesn’t collect payment in a timely manner. This is another huge drain on cash.
Profitability is huge. You can’t run a successful business without it. But cash flow is even more important. Cash flow is complex and can come from many different areas. Too many different areas to cover in this letter.
To your profitability, or…your cash flow that is.