Advice Counts By Mike Kunkel profitteammike@gmail.com

Getting Your COGS in a Row O

ne of the biggest mistakes that we see in our consulting visits is that many in our industry use their current month vehicle purchases as their month- ly cost of goods (COGS). We know that we do not sell the parts off of those vehi- cles in the same month that we purchase them. By throwing purchases into COGS, we turn our profit & loss statement (P&L) into a cash flow statement. The online banking statement suffices, then, to tell us how much cash we have, so a cash flow statement is not needed. We know that you have always done it this way and it has worked. While this may be true, it makes it impossible to truly run your business by the numbers. We know that the more money you spend on inventory, the tighter cash flow can be. This is reflected on the cash flow statement by showing little money or profit in months of heavy buying and the opposite in light months. If we used the cash flow statement or incorrect P & L to run the business, it would tell us to buy less inventory to push profitability up. We all know that inventory is king and a lack of it will cause sales to plummet in about 45 days.

Another huge problem with this model is that you do not have a realistic idea of how much inventory you really sold at cost. We use this number to determine how much our buying budget should be to replace the sold inventory. Buying less than we sold will reduce in-stock sales and buying more will allow us to grow our sales.

Jim Counts has had a COGS sheet for many years that is a generally accepted accounting principal (GAP). Why is GAP important? It is consistent, accurate, provable and, most importantly, some- thing that we can wrap our business man- agement plan around. Yet, what does that mean? To me, it means we can avoid the 6 P’s. The 6 P’s are Piss Poor Planning Prevents

20 Automotive Recycling | May-June 2015

Performance. A company that does not have a plan is like a ship at sea without a captain. There are countless examples of companies growing at record pace and then failing. Ultimately, the failure to be able to finance the growth is what dooms them.

Having a solid P & L will tell us how we are doing. Having an accurate COGS will allow us to forecast what our purchases will produce in sales. Those two pieces will let us know what our cash situation will be well in advance and how much of the line of credit we will be needing to fund growth. It will also tell us how much profit we can expect to have and there is nothing wrong with going into a profit taking mode if you desire.

a number of things. First, we can tell what the true cost of inventory in dollars was. This can then be subtracted from your general ledger inventory amount while your purchases are added to the account. That same dollar amount is entered on the P & L to give us an accurate look at the profitability of the company. That number also will set our buying budget for the following month based on the replacement value of the inventory sold. It will also tell us what the expected gross margin per unit will be. Powerful infor- mation that will allow us to make a busi- ness plan that will accomplish what we want with the business.

How much does the sheet cost? It is such an important piece of what we do

We all know that inventory is king and a lack of it will cause sales to plummet in about 45 days.

How do you go about correcting this problem if you are not currently using a GAP method of COGS? Is the Shaw Sheet that Jim used still the best way to go about coming up with your COGS dollars? Both of these questions have the same answer. Bill Stevens and I have come up with a new version of the Shaw Sheet that is now known as the Inventory Workbook or V8.

What is the V8? It uses a number of user input fields to tell you some really valuable information. The sheet wants to know your sales, vehicle purchases – dol- lars & units along with your towing and buyers fees. Those numbers are stretched out over a period of time to determine what your COGS percentage is. That per- centage varies monthly depending on the input numbers.

What do we do with the V8? There are

as consultants, we feel compelled to pro- vide it to our customers free of charge. Bill and I would love to get you using the sheet so please feel free to contact us and we will send it to you and set up a phone consultation if needed. We are in a dynamic time in our indus-

try and the properly prepared recycler will capitalize on it. Please do not hesitate to contact us to make sure you are in a position to be one of the prepared recy- clers.

Mike Kunkel has 35 years’ experience in the auto industry, with 20 years serving as general manager of a salvage facility. He is immediate past president and a founding member of TEAM PRP, a noted speaker, and past chair of the Used

Parts Committee at the Collision Industry Council. His ex- pertise is streamlining processes and maximizing the rev- enues per employee, measuring historical data when buying to build a growth/profit strategy, and the Pinnacle system.