How to Know When Something Is Wrong With Your Shop’s Financials

“If something was wrong, my accountant would tell me.”

That sounds reasonable. It can also be a dangerous assumption.

Lucas Underwood shared those exact words from his dad during a recent conversation with David Roman and me. Their family had trusted someone else to handle the financial side of the business. Meanwhile, there were serious problems happening behind the scenes, including money being taken and taxes not being paid.

By the time you find out something is wrong, the damage may already be done.

That doesn’t mean every shop owner needs to become an accountant or do their own bookkeeping. In fact, I’d argue the opposite. But you do need enough financial understanding to recognize when the numbers in front of you don’t make sense.

Your Financials Don’t Have to Be Perfect. They Have to Be Useful.

I see shop owners get hung up on having a perfect set of books. They’re trying to reconcile everything down to the penny while the information they’re working with is already months old.

Perfect isn’t the goal. Directionally correct is the goal.

Can I use these financial statements to make a decision and know I’m relying on good enough data to make a good decision? That’s what matters.

If it takes six months to get your books perfect, you’ve lost a lot of the value of having that information. You can’t go back and change what happened six months ago. Your financials should help you understand what is happening in the business while you still have time to do something about it.

“Let’s go for directionally correct.” — Eric Joern

How Can You Tell if Your Auto Repair Shop’s Books Are Wrong?

Start with what you already know about your business.

You don’t need an accounting degree to know approximately how much cash you have in the bank. You probably have a pretty good idea of what you owe on your loans, what your parts bills typically look like and whether you have a large amount sitting on your credit cards.

Your financial statements should reflect that reality. One place to start is your balance sheet.

Look at the cash, credit cards, loans, accounts payable, receivables and inventory. Then ask some very basic questions: Do I actually have that much cash? Do I really owe that much money? Does someone actually owe me that amount? Do I really have that much inventory?

The things you know about your business should line up with what your financial statements are telling you. If they don’t, that deserves a closer look.

I recently saw a situation where roughly $80,000 in credit card expenses had not been captured properly. The problem was sitting there on the balance sheet.

You didn’t need to be a CPA to spot the warning sign. You just needed to look at the number and ask, “Do I really have $80,000 in credit cards outstanding?” If the answer is obviously no, something isn’t right.

Why Your P&L Doesn’t Tell You the Whole Story

Your P&L is one of the most useful tools for understanding how your shop is performing. But it can’t tell you whether everything in your books is right.

A P&L can look clean while there are problems sitting on the balance sheet. That’s why I call the balance sheet the “truth teller” of the financials. It gives you another way to test whether the numbers make sense by looking at what the business owns and owes.

If the P&L shows a healthy business but the cash, credit cards, loans, receivables or other balances don’t match what you know about the business, that’s a sign to dig deeper.

Are Your Financial Statements Detailed Enough to Run the Shop?

David and Lucas brought up another problem I see regularly: owners trying to run the business with financial information that doesn’t tell them enough.

During our conversation, we talked about one shop with a P&L that essentially had income, cost of goods and a single expense category. Technically, those are financial statements. They just aren’t particularly useful financial statements.

If you want to make intentional decisions about the business, you need enough detail to understand what is actually driving the results. For an auto repair shop, that includes things like parts gross profit and labor gross profit. If you need help calculating what your technicians actually cost the business, our Labor Costing Tool walks you through loaded labor cost step by step. 

Your shop management system gives you important operational information. Your accounting system gives you another view of the business. Neither should exist in a vacuum.

Good decisions depend on good data.

Can You Outsource Your Bookkeeping?

Absolutely. You can outsource the work. You shouldn’t outsource your understanding.

Lucas talked openly about this during our conversation. He doesn’t enjoy the financial work, and at different points he tried to find somebody else who would simply take it off his plate. There’s nothing wrong with that.

You don’t need to personally categorize every transaction or reconcile every account. But whoever is doing that work should be able to explain what they’re doing, show you the results and help you understand what those results mean. And you need to hold them accountable for that.

If your entire relationship with your accountant or bookkeeper consists of sending information over and hoping they’ll tell you if something goes wrong, you’re giving up too much visibility into your own business.

“If you don’t understand it, if you don’t know what to look for, man, you can get yourself in trouble quick.” — Lucas Underwood

Trust Is Important. It Isn’t an Internal Control.

This was probably the most uncomfortable part of our conversation. Most business owners want to trust their people, and they should. But trust doesn’t mean one person should have unchecked control over the books, payroll, taxes and movement of money.

Lucas has firsthand experience with what can happen when those protections aren’t there. We also talked through examples of financial fraud that can be surprisingly difficult for an owner to see if nobody is checking the underlying activity.

Imagine that someone has the ability to create a new vendor in your bill-pay system and also control where that vendor’s payments are sent. You look at the report and see the familiar vendor name, so everything appears normal. Except the bank account attached to that vendor has been changed, and the payment isn’t going where you think it is.

That’s why internal controls matter.

Who can add or change vendors? Who can move money or authorize payments? Who has access to payroll? Who reviews the bank and credit card activity?

Those questions aren’t about assuming everybody is dishonest. They’re about building a business where one mistake, one bad decision or one dishonest person can’t create an enormous financial problem without anyone noticing.

Stop Waiting for Someone Else to Find the Problem

There was a line Lucas shared during our conversation that stuck with me:

“If you’re waiting on your accountant to tell you something’s wrong, something’s already wrong.” — Rick White, as shared by Lucas Underwood

That doesn’t mean your accountant shouldn’t be looking out for you. It means the owner still has a role.

You should know what you expect from the business each month and then use the financial statements to measure whether you actually got there. Without that intentionality, it’s easy to fall into a pattern where whatever happened, happened. If you’re not sure where the numbers may be getting away from you, our Profit Leak Diagnostic can help you identify areas worth a closer look. Revenue was what it was. Profit was what it was. Cash is whatever is sitting in the account. Then you move on to another month.

That isn’t really managing the financial side of the business. It’s reporting what already happened.

Know Enough to Ask When Something Doesn’t Make Sense

You don’t need to turn yourself into a CPA or do your own bookkeeping, and your financials don’t have to be perfect. But you should understand them well enough to look at your business and ask some basic questions.

Does the cash on the balance sheet look right? Do the loans and credit cards look right? Do the financial statements reflect what you know is happening in the shop? Are your parts and labor margins where you expected them to be? Did you actually hit the financial targets you set for the month?

And if something doesn’t make sense, can the person responsible for your financials explain it?

The goal isn’t to know everything. It’s to know enough that you aren’t operating on hope.

Whether it’s bad bookkeeping, a missed tax obligation, a process problem or something more serious, the earlier you recognize that the numbers don’t make sense, the more opportunity you have to figure out why.

Hear the Full Conversation
Watch the episode above, or listen to Under the Hood CPA wherever you get your podcasts.

Want to Know What Your Numbers Are Telling You?

Kaizen CPAs + Advisors works with auto repair shop owners who want better financial information and a clearer understanding of what’s happening in their business.