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Originally Posted On: https://www.tekmetric.com/blog-post/auto-repair-shop-accounting-software

For many shop owners, the accounting side of business can be overwhelming. After all, there’s probably a good reason why you decided to start an auto repair business and not an accounting firm—you enjoy fixing cars and helping people, not staring at numbers all day.

But when you’re in the shop owner’s seat, it’s vital for you to have a firm grasp on your books. If you want your business to succeed over the long haul, your financial statements need to be complete, consistent, and comparable.

You should account for all transactions, not only your sales and expenses on parts and labor but also your taxes, warranties, refunds, cores, and any other major or minor transactions that may fall by the wayside. “Complete” also means that all relevant information such as dates, purchase order numbers, and vendor names are included on each statement. Complete statements will give you the clearest idea of how much money you actually have to invest back into your business at the end of each sales cycle.

You should have a regular schedule and method for tracking what your business makes and what your business spends. It’s good practice to check your numbers at least once a month, and conduct a thorough reconciliation and analysis of your books at least once every business quarter. By regularly checking your statements, you can quickly catch any errors or instances of loss, whether it’s from theft, slip-ups, or forgetfulness. After all, we all forget things, and when we do, it’s best to realize it as soon as possible.

Comparable financial statements help you spot trends, which will make it easier to work with an accountant or a consultant and make better business decisions. You should be able to cross-reference your financial statements with purchase orders, receipts, and other financial reports. If your financial statements are complete and consistent with one another, then they should already be easy to compare. But it’s also worth considering how the financial data in your shop management system “talks to” the financial data in your accounting software.

Shop owners looking to grow their business should always be asking themselves, “What are my margins?” If you want to invest in new tools, new talent, and new locations, you need to know how much money you actually have after your income and expenses have been accounted for. There are two places that your shop can and should be tracking your margins: your shop management system and your accounting software.

If you read the above sentence thinking, “Why do I need both? Isn’t it redundant to use both a shop management system and an auto repair shop accounting software?” you’re not alone. In fact, a lot of shop owners swear by the reports in their shop management system—and hey, if you’re using a shop management system like Tekmetric, then those reports are going to give you a good baseline to go by.

But if we’re going to make sure our financial statements are indeed complete, consistent, and comparable, we need to have something to verify the financial reports we see in our shop management system. There are aspects of your business such as paid time off, benefits, and payroll taxes that your shop management system isn’t going to factor into your gross profit margin.

We can’t ignore our accounting software because, at the end of the day, Tekmetric or any other shop management software out there is what we think we’re making—it’s what we think our margins are; it’s what we think we pay for parts; it’s what we think we pay our employees.

At the end of a sales period, an auto repair shop accounting software like QuickBooks is going to tell you how much money your shop made in sales, how much you paid in expenses, and what your actual margins are. Right, wrong, or indifferent, there is useful information in both solutions, and we need to make sure that we understand why those do match or why they don’t match.

While there are quite a few facets that make up your “books” or accounting log, you can simplify things by dividing your sales and expenses into categories. Probably the best categories to start with are as follows:

• Parts
• Labor
• Shop supplies
• Sublet work

Parts, labor, shop supplies, and sublet work will form the basis of your profit and loss statements. If you do not divide your sales and expenses, you’re going to have to manually go in and calculate everything, which can take up a lot of your time.

The good thing is that a shop management system and accounting software will make it easy to divide your sales and expenses into reports.

Before we get into how to synchronize your shop management system and your auto repair shop accounting software, let’s look at the tools that Tekmetric provides shop owners to get a sense of their numbers.

Tekmetric includes an assortment of financial reports that can be customized and broken down in various ways. But the three financial reports that give shop owners the highest-level look at the financial health of their business are the End-of-Day Report, the Parts Usage Report, and the Parts Purchased Report.

Tekmetric’s End-of-Day Report automatically pulls all the sales data inputted into Tekmetric and generates some of the most important business metrics for shop owners to follow. It includes your shop’s Average RO in Sales and Profits, your Profit Margin, your Gross Sales, and your Gross Profit.

While the End-of-Day Report defaults to showing your shop’s earnings for the day, it can be set to show your shop’s earnings for any date range that you want. This is where shop owners can get a good forecast of how much money their shop is making. You can even compare how your shop is doing over different periods of time.

It’s important to remember that the End-of-Day Report pulls from everything put into Tekmetric, but there may be other sources of revenue and expenses that don’t make it into Tekmetric, so this report may not be 100% accurate. To have complete accuracy, you should use Tekmetric in conjunction with an auto repair shop accounting software.

The End-of-Day Report will show you critical stats about your shop, such as your Average RO in Sales and Profits, your Profit Margin, and your Gross Profit.

However, you also need to keep track of every part your shop purchases and sells. When you’re buying and selling parts, it can be tough to keep track of everything—especially manually! A lot can happen. For example, parts can get lost in some corner of the shop, get stolen, or just not be accounted for in a repair estimate.

Minimizing loss is what Tekmetric’s two parts reports—the Parts Purchased Report and Parts Usage Report—do best. When you use these reports alongside each other, you can compare the parts your shop has purchased with the parts your shop has actually used.

The Parts Purchased Report will give you the key details about parts your shop has purchased, including the:

• Name of the part
• Vendor
• PO#
• RO Source
• Date Purchased
• Quantity
• Unit Cost
• Total Cost
• Ordering Employee

The Parts Usage Report will show you exactly when each part was used. You’ll get details including:

• The job title
• The job category
• The RO number it was used in

• The customer and vehicle associated with the part
• The technician associated with the job that involved the part

The combination of Tekmetric’s Parts Purchased Report, Parts Usage Report, and your accounting software add up to a powerful reconciliation tool. (Since QuickBooks is one of the most commonly used in the industry, that’s the example we’ll be using).

When you compare information between Tekmetric’s reports and QuickBooks, you can pinpoint the specific date range when things started to go astray with a particular type of part or vendor, determine how much you’re actually profiting from a given part, and identify any disconnects like “magically” disappearing parts, ex-employees using your shop’s charge accounts, and so forth.

For instance, let’s say you pull up the Parts Purchased Report and see that your shop purchased 100 oil filters two months ago, and QuickBooks corroborates this information. However, when you pull up the Parts Usage Report, it indicates that none of those oil filters have been used in those two months! From there, you can start to narrow down different possibilities for the 75 remaining oil filters:

• Maybe the service advisors forgot to log those parts
• Maybe the parts were stolen
• Maybe a former employee somehow ordered those parts
• Maybe your shop really had no use for those parts in the last two months

Here’s another example: let’s say that a particular part shows up on two repair orders in Tekmetric’s Parts Usage Report. When you check Tekmetric’s Parts Purchased Report, you see two orders of that part. So far, so good. But when you turn to QuickBooks, you see ten orders for that part. So, what happened?

Perhaps a service advisor ordered those parts outside of Tekmetric and didn’t properly log them in the system. Or, perhaps an ex-employee is using your shop’s charge account on accident—or on purpose.

Once you find the root cause, you can take the necessary steps to ensure such a thing doesn’t happen again. You can reiterate to all of your service advisors that logging parts ordered outside of Tekmetric is a must-do, every time. If the problem is with an ex-employee, you can cut off their access to your charge account and create stricter offboarding procedures moving forward.

The best way to make sure you don’t run into any headaches when comparing the information in Tekmetric’s Parts Purchased Report, Tekmetric’s Parts Usage Report, and your auto repair shop accounting software is to get your parts process in order from the get-go. Training your team and implementing repeatable processes for logging and tracking every part will save you time down the line.

A streamlined parts ordering and documentation process starts with your service writers. If they input the wrong information in Tekmetric or forget to do so at all, it’ll have a trickle-down effect. You’ll end up scratching your head when things don’t line up in  QuickBooks and the Parts Purchased Report and Parts Usage Report in Tekmetric.

To obtain a healthy parts margin, it’s essential to spend time making sure service writers understand your shop’s guidelines on parts ordering and documentation. You could make it a policy that service writers can only order parts from certain vendors within Tekmetric, and if they want to bypass that, they have to get permission from you first. Then, you could tell them that they must log each part that’s ordered and used as soon as possible. That way, the chance that they forget to input a part order or add a part to a repair order will be minimized, and you won’t have to scroll through pages of statements down the line.

The day you snag a deal on a part is always a good one. However, be sure to follow that win by tweaking your shop’s parts markup matrix. Your shop’s parts matrix is what helps you markup parts in a fair way, and in turn, earn the appropriate profit on each part you sell.

If you don’t adjust the markup for the particular part you got for less, you’ll be losing money. For example, say your markup on a $100 part is usually 15%. But, if you get that part for $80 the next time, you might consider bumping up the markup to 20%.

Earlier, we discussed how it’s good practice to check all your numbers at least once a month, and also thoroughly reconcile and analyze your books at least once a business quarter. You should apply a similar mindset to all things having to do with parts ordering at your shop; about once a month, review the parts information you have in QuickBooks, and see how it corresponds to what’s in your Parts Purchased Report and Parts Usage Report.

Question: What’s the best way to get an accurate understanding of what my shop spends on parts?

Answer: If your shop doesn’t have a large amount of inventory sitting around, or if you do have a large amount of inventory but it doesn’t tend to fluctuable much, we recommend that you look at the cost of goods sold in QuickBooks and compare it to the data in Tekmetric’s Parts Purchased Report.

However, if your shop does have a large amount of fluctuating inventory, then you might have to go to QuickBooks and add up the costs of goods sold with your inventory that’s been added to assets (perhaps in the same time period). With a large amount of fluctuating inventory, you’ll see some slight discrepancies with the information on Tekmetric’s Parts Purchased Report. That’s because that report could include parts you brought in for specific repair orders, as well as parts you have in your inventory. (In that case, looking at Tekmetric’s Parts Usage Report will give you a clearer picture).

Question: Should I enter each part I purchase into QuickBooks?

Answer: Not if you’re keeping good track of your statements!

Entering each part into both QuickBooks and your shop management system can be a mountain of work that may not be worth the hassle. Ultimately, your goal is to get the most accurate numbers possible, and then make smart decisions for your shop based on that information. And you can quickly achieve that by entering your invoice totals.

By logging each and every part transaction into QuickBooks, you’ll reach 100% accuracy, but will be unnecessarily getting lost in the weeds. The reality is that most shops will be a-ok simply putting their monthly statements into QuickBooks and being in the “ballpark,” such as 95% accuracy, rather than 100% accuracy.

The only time you may want to start entering every part purchase into QuickBooks is if your shop is dealing with a stressful parts inventory or parts management issue.

Question: If my shop does have a need to enter each purchased part into QuickBooks, how long should I do this for, and how often?

Answer: The level of work involved with putting every single purchase order into QuickBooks could almost amount to full-time hours.

That’s why you should give yourself a deadline. For example, you can log every single purchased part into QuickBooks for the next three months, and by then, your goal is to put in place the right inventory and stock management practices, as well as match parts from repair orders on purchase orders, so you don’t need to do so again.

Also, within the scope of that deadline, decide if you and your team will log each part order daily, weekly, or monthly. By setting aside a dedicated time to do so, you can avoid disrupting your workflow as a group.

Question: If I’m using a cash basis of accounting, when should I switch to the accrual basis?

Answer: The short answer is that you should switch to accrual basis when your business gets more complicated, or even when you decide that you’re ready to majorly grow your business. When you grow your shop, you’ll be dealing larger parts orders between multiple vendors and suppliers, more jobs coming in, and additional team members. Once a lot of money is going in and out, it’ll become essential to log your income and expenses in realtime, which is only possible with an accrual basis of accounting.

A shop management system like Tekmetric helps your team track your shop’s purchases and sales. But of course, all of that financial data must also line up in your auto repair shop accounting software.

Your shop’s labor gross profit margin is a particular piece of data that’s tricky to align between both your shop management system and your accounting software.

Why? It comes down to how you pay your technicians, which in part likely depends on the labor times your shop is using.

With a shop management system like Tekmetric, you can input an hourly rate for your technicians. Tekmetric tracks additional key data points, such as how many hours each technician works a day and how much your shop sells each day. But, some things aren’t always factored in, like vacation and benefits. As for payroll taxes, the system doesn’t account for those either.

What can end up happening as a result is the labor profit margin in Tekmetric will almost always be higher than the real-life number in QuickBooks. And depending on what your shop’s compensation structure is, it might be impossible to get the numbers to match 100% in both systems.

However, you can get the numbers extremely close (for example, the number in Tekmetric might be $15,300, and the number in QuickBooks might be $15,500). Here are ways you can get your labor gross profit margin numbers in Tekmetric and QuickBooks closer together:

Tekmetric integrates with Back Office. Back Office uses a tool called Accounting Link to transfer your shop’s sales, payments, and purchases into QuickBooks. Using Accounting Link via the Back Office will ensure that the information sent to QuickBooks is accurate—you won’t have to worry about manually typing in an incorrect number. You can review and verify the information before it gets sent to QuickBooks. With Accounting Link, you’ll also save time because you won’t have to input the numbers twice.

Additionally, you can use Tekmetric’s Shop Settings to minimize financial discrepancies. If you see 100% gross profit on a line of a job, chances are you either: 1) didn’t have a cost assigned to the technician or 2) didn’t have a technician assigned to the job.

In either case, it means that there’s a $0 cost for the labor your shop is selling.

So, as a starting point, make sure your service advisors assign a cost to each technician within Tekmetric and assign each job to a technician.

If you want your payroll to be as accurate as possible in Tekmetric, you can also bump up your technician’s hourly rate within Tekmetric to account for additional overhead costs, such as benefits, healthcare, and 401k expenses. So, if your technicians’ hourly rate is $40, then you can bump it up to $45 in Tekmetric to account for that extra overhead.

Many shops might find themselves in a situation where their parts profit margin reported in Tekmetric might not line up with what’s in QuickBooks. For example, the End-of-Day Report in Tekmetric indicates that they are hitting that target; they sold $50,000 worth of parts with $25,000 in costs.

But QuickBooks tells a different story—a 30% parts margin, with $50,000 in spend and $35,000 in costs. That $10,000 difference in costs is concerning; something is majorly off.

Of course, by using the Back Office integration, you can stop these types of problems in their tracks. But here’s what else you can do.

You can go into QuickBooks and pull up a report for the Costs-of-Goods sold for parts, which will show every transaction you made from the first day of that month to the last day of that month.

From there, you can do several things to sort through the data and make sense of it, including putting it into Excel or analyzing it by vendor. You can then compare that data with what’s in Tekmetric’s Parts Purchased Report to see where that $10,000 came from.

Perhaps you see that in QuickBooks, it shows that you spent $10,000 with a particular vendor, but in Tekmetric, it shows you’ve spent $0 with that vendor that month. Clearly, that’s a problem; somewhere, somehow, something slipped under the radar.

As you continue investigating, you’ll likely find the answer. Perhaps an ex-employee had used your name and account to purchase parts. Or, there could be a smaller reason for that disconnect, namely, things like cores and warranties. If you’re not getting that money on the back-end from your vendors, that can cut into your parts profit margin.

Once you figure out the cause, you can take the necessary steps to ensure it never happens again. So, in the case of the ex-employee using your name and account to purchase parts, you can place stronger safeguards for all departing employees to ensure they’ll never have access to your account again once your shop no longer employs them.

Ultimately, if you paid for a part, make sure you can match it to a paid ticket in Tekmetric. It’s best practice to conduct regular spot checks to catch anything that’s not lining up along the way versus having to face an unpleasant surprise at the end of the month.

It’s totally natural to be intimidated by accounting, especially if it’s the first time that you’ve waded into the financial side of your business. But with experience and time, you’ll get the hang of things. Little by little, you’ll be able to look at a discrepancy and say “Oh! I understand what’s going on here.”

Focus on those small wins, and always continue learning. Dig behind the numbers, learn how to analyze them, and ask your accountant and team members questions along the way. Train your service advisors to get the basics right, too, so you have back up right there at the shop. Even if your shop doesn’t face a particular accounting challenge today, it doesn’t mean it won’t in the future.

By learning even just the basics of accounting, you’re putting your shop in the best financial position by securing the best profit margins possible.