Cash flow management remains a major headache for small companies of all kinds, preventing many firms from making payroll, paying bills or even staying in business. Getting a handle on cash flowing in through accounts receivable (AR), and money flowing out through payroll and accounts payable (AP), is no easy task for resource-strapped SMBs – but in the auto collision market, cash flow complexities can be more extreme than the average mom-and-pop shop.
When an auto accident occurs, the financial transactions associated with repairing a vehicle are anything but straightforward. Between the management of insurance provider relationships, fluctuating labor rates and unique challenges in procuring parts, this industry’s cash flows are highly complex. In many cases, they limit a shop’s ability to accurately manage financials and prevent losses.
“Repair facilities have a unique situation [compared to] most small businesses in that they have a complicated payments scenario,” explained Mitchell International Vice President of Repair Industry Solutions Workflow Jack Rozint in a recent interview with PYMNTS.
The accounts receivable process for these repair shops is particularly complicated – but as Rozint explained, AR isn’t the only function creating cash flow bottlenecks and a lack of transparency.
Cash Inflow Complexity
Collision repair shops’ insurance provider relationships mean receivables aren’t coming in from the same payer – or even at the same time, Rozint noted.
“Instead of a customer coming in, having their car repaired and paying the shop for that transaction, in collision repair you typically have an insurance claim involved,” he said. “The insurance company is the one paying the repair facility, less the deductible. Now you’re collecting $500 from the consumer and getting paid the balance on the repair from the insurance company.”
To make things even more complicated, a car owner will often request additional repairs unrelated to the accident, adding a different category of receivable on the same vehicle.
All of these transactions will come in at different times and in different ways, too. For instance, an insurance provider will send an ACH transaction upon completion of a job, but a car owner may pay via credit card when they pick up the vehicle. Further, in the case of an auto collision in which a third party is at fault, and that third party’s insurance provider will be paying for the repairs, there is no guarantee that the repair shop has a relationship with that particular insurance company, thereby raising the risk of coverage disputes and delayed insurance payouts.
When repair shops are managing receivables for hundreds of vehicle repair jobs, the complexities of invoicing and tracking incoming payments can quickly become overwhelming. But as Rozint warned, accounts receivable management challenges are only one side of this industry’s cash flow management story.
Cash Outflow Volatility
On the AP end, Rozint said collision repair shops tend to have a fixed number of trusted suppliers that can make the procurement process more efficient, though these businesses tend to have a high volume of payables.
“But the real complexity,” he said, “comes from the fact that parts often get returned.”
This is a frequent occurrence in the collision repair market. During a collision, a car part may have fallen off, but perhaps was not damaged and can still be used in the repair process, meaning the shop will have to return the unnecessary replacement part. In another scenario, Rozint explained that a shop may have ordered an after-market part that does not correctly fit the vehicle, leading the shop to have to return that part for credit and purchase an OEM (original equipment manufacturer) part direct from the dealer.
“If I don’t track those parts correctly with the vendors, I’m not going to get credit for everything I return and make sure I get my money back,” he said. “When you’re talking hundreds of repairs in a month, with maybe 50 to 100 parts per repair, and some percentage of them are getting returned, it can get complicated if you don’t have good systems to track it. You can lose a lot of money.”
Also unique to this market is another way cash outflows can become tangled up: labor costs.
As Rozint explained, in the collision repair space – unlike the mechanical repair industry – insurance companies will negotiate and set labor rates for the shops. For one single dealership, labor rates in the collision center might be significantly different than for mechanical repairs.
For those collision centers, a variety of plans can be deployed to set wages. Workers doing different types of repair work may get a percentage on a single repair order, or shops may offer a flat-rate salary plus a bonus. In another scenario, a shop may deploy a plan in which each different worker on a single auto repair job is paid from a group plan.
Finding a Unified View
Considering these complexities, Rozint noted that it’s critical for these shops to have a streamlined view of their cash inflows and outflows. Even more important is for business management platforms like Mitchell to integrate into their existing accounting platforms, which was the motivation behind Mitchell’s RepairCenter’s recent integration into Intuit QuickBooks Online.
Cash flow management continues to be a major pain point for small businesses of all kinds. Researchers at Intuit QuickBooks last year found that cash flow challenges are preventing one-third of U.S. small businesses from paying their own bills and making payroll.
Considering the unique complexities of the collision repair arena, Rozint said it is imperative that these small businesses embrace digitization and back-office data integration, enabling the repair facility to “quickly and easily integrate that complicated repair order without any additional rekeying into their accounting system.”