Are you an independent mechanic or running a garage?
The car garage industry faces unique challenges because of its position between parts manufacturers versus car owners and the need to adapt to new car technologies with each passing year.
Keeping track of inventory orders and estimating labour costs can make your bookkeeping demanding and time-consuming. That’s why finding ways to keep your finance records accurate and updated is essential to save time and stress.
In this article, we’ll share everything you need to know about bookkeeping in the mechanic and independent garage industry, including easy software tools to help make your job easier. Find out:
- Basic bookkeeping practices for your business
- Bookkeeping for specialist mechanics
- How to add VAT to your costs
- Industry pressures faced by mechanics and garages
- Small business insurance you should have
- How Countingup can help you run your business effectively
Countingup makes it easier to run your business. Read on to find out how.
Basic bookkeeping practices for your business
The first step in running a business is choosing between different types of accounting methods. Each method has pros and cons for your business and end-of-year tax filings, so knowing how it impacts your financial records is essential to stay compliant.
Once you’ve chosen a method, you’ll need to make sure it’s up to date and accurate. Find out how you can do both below.
Choosing an accounting system
As you’re trading, you’ll need to decide on an accounting method to use throughout your business: this is how you’ll keep track of your income and expenses. Whatever option you choose will make sure your trading is consistent and accurate throughout the year. However, each impacts your business’ cash flow and tax calculations. Find out why below:
Cash accounting means you record income and expenses when they’re paid, rather than when they’re initially requested or ordered. Cash accounting may be more suitable if your business deals in smaller transactions or transfers that can be more easily provided – particularly in customer-facing businesses like commercial garages.
As you’re filing tax returns each year, your calculations should be based on income and expenditure transfers within the financial year.
Traditional or ‘Accrual’ accounting
Contrastingly, traditional accounting uses invoicing where payments are delayed for a period of time and is required in businesses with a turnover greater than £150,000.
This accounting method can help improve your business’ cash flow and is more common with larger transaction sums or business-to-business relationships. Therefore, if your business specialises in larger-scale body or repair work for customers, you could consider traditional accounting.
Your tax filings should use transactions that took place within the previous financial year (even if some payments are delayed into the new financial year).
Calculating job costing
With your method of recording income and expenses established, you’ll now need to be able to calculate estimates and quotes for client work. These will serve as your measures of income for your business and will allow you to manage the profitability of each new job.
Use the following formula:
direct materials + direct labour + applied overheads = total job cost
Once you’ve calculated the cost you’ll incur per job, you can work out how much profit you’ll make once it’s paid. Depending on whether you’ve given a quote or an estimate, this may vary. As you trade, you’ll become better at providing more accurate estimates but until then, you can use your final payment figure from customers.
If you’ve provided an estimate to a customer, make sure you have permission to carry out any additional work you’ve identified or didn’t expect to encounter. Depending on the circumstances, customers may not be obligated to pay for additional work without their confirmation.
As your income may often rely on ordering parts, you’ll need to record these as expenses.
As you order, you should receive invoices and receipts. Use these to make records that are as detailed as possible, including additional details such as the transaction date, vendor, and job ticket. This will help your profitability as you’ll be able to track individual job revenues and make filing your tax returns easier as you won’t have to remember up to 12 months of trading history.
Common expenses you may encounter
This list isn’t exhaustive, however, here are some typical expenses your business may have:
- Parts (individual or batch orders)
- Business registration and licensing
- Tools and equipment
- Other materials, such as oils and lubricants
- Safety equipment and uniform
- Subcontractors or staff (if relevant)
- Bookkeeping software and accounting
Accounting software can help you manage your expense records with handy tools like the receipt capture feature offered by Countingup.
Once you’ve costed a job for a customer, it’s often best practice to provide an invoice.
This document should provide a breakdown of the associated costs, VAT (if applicable) and can sometimes include payment instructions. Invoices aren’t just for customers, however: you should keep a copy to record income sources . The Countingup app offers automated invoicing to save you time, and notifies you when you’ve been paid.
How to reconcile your accounts
Reconciling your bank accounts means making sure they match the details you’ve recorded in your accounting system. You can use the steps below to check your accounts:
- Compare your bank records to your expense records
- If they don’t match, identify where the differences are and update your records
- Compare transactions to the income in your revenue sheet
- If you expect certain payments to have been made already, contact your bank
Even if you have them recorded, unexpected expenses can also affect your accounts as they will have impacted your profit forecasts. You will need to update any accounting projections you’ve made and adjust your expenses accordingly.
Using an app like Countingup, which is a 2-in-1 business current account with built-in accounting software will save you the manual admin associated with reconciling your accounts and automate expense categorisation two.
Managing cash flow
Whether it’s to manage unexpected expenses or cover day-to-day costs, making sure you aren’t short on cash is a crucial element of business. This is called ‘cash flow’. Poor cash flow is a common reason why many businesses go bankrupt.
If you’re handling routine jobs like MOTs or servicing, cash flow shouldn’t be too big of an issue. However, if you’re looking to take on longer projects, you’ll need to have some cash available to cover costs until your customers pay for the completed work.
Managing your cash flow carefully is one of the best ways to ensure the success of your small business. Read more in our article Cash Flow 101.
Bookkeeping for specialist mechanics
If you run a more specialist car garage, the bookkeeping tips outlined above will largely be the same for your business.
While your expenses might differ slightly, like having higher insurance premiums or import costs on parts, the basics elements of bookkeeping and business management are much the same. As long as you accurately record and manage your accounts, your business should be tax compliant.
Adding VAT to your costs
If your business’ turnover is greater than £85,000, you have to register for VAT.
To charge VAT, increase your prices by 20% by multiplying your business’ offers by 1.2.
VAT is a tax paid by customers, not you. Therefore, when you register for VAT, you need to charge the right amount of VAT, provide this to HMRC and record your VAT as your trade. Make sure to charge the correct rate of VAT as otherwise, you may be liable to HMRC for the remaining portion.
You can reclaim VAT on your costs by submitting a VAT return to HMRC, so your prices can still be competitive. Some vehicles, such as caravans, are VAT exempt, so make sure you’re charging customers the correct and fair rates. Managing your VAT records and submitting a VAT return is easy with the Countingup app.
You can voluntarily register for VAT below the £85,000 threshold. For example, if your revenue is expected to increase across the financial year to over £85, 000. This will mean you’re already tax compliant when your income grows past this point and in the future. As you can reclaim the VAT you charge, your business won’t face any additional costs. However, you cannot charge VAT if you’re not registered and you won’t be eligible to reclaim any portion either.
Industry pressures faced by mechanics and garages
Private mechanics and garage businesses are highly regulated and are currently facing complex industry changes. Your accounting will need to meet the required regulatory standards as well as protect your business through proper expensing on business necessities.
Below, we discuss some of the shifts mechanics and garages should expect, and how they might impact your accounting as you run your business.
Automation tech and electric vehicles
Cars are increasingly reliant on automated systems to help their owners drive more safely and easily. For mechanics, this means training in a broader skill-set to meet new repair challenges, and having the car parts available in stock.
For example, at one end, this includes having to order vehicle parts to cover the more traditional and modern elements of new cars. However, as electric vehicles become more popular, even mechanic staples like engine parts are evolving as you’re expected to work with different engine types. Therefore, your accounting needs to be able to keep track of these emerging sources of expenses.
MOT standards and consumer rights
As you’re providing repair and maintenance for customers, like MOT and servicing, your costs and offers are subject to the Consumer Rights Act 2015.
This requires your prices and operations to be ‘reasonable’. Therefore, you must have consistent records of what you charge customers and what you declare to HMRC as income. Having accurate and transparent records is vital.
Independent operators versus larger chains
While the presence of larger players in a market isn’t a new phenomenon, independent car garages continue to face challenges against bigger competitors.
As you’re looking to build your business, consider whether you can pivot to specialist repairs or provide general service to as many customers as possible.
An independent garage may see more success by remaining a generalised service provider, as it won’t be affected by any one manufacturer’s sales decreases. However, providing more niche repairs for unique or less popular car types might give your business a competitive edge and can cover other losses in your accounts.
Small business insurance you should have
Most businesses have similar insurance policies, however, mechanics and garages are eligible for additional coverage that protects their specific circumstances. Read the list below to find out what you should consider for your business:
- Public liability insurance (to protect your customers)
- Employers’ Liability insurance (if you have staff)
- Motor Trade insurance (for client’s vehicles)
- Contents insurance (to cover your equipment and tools)
- Business buildings insurance (if you own your premises)
How Countingup can help you run your business effectively
Setting up and expanding a business takes a lot of effort, but Countingup offers unique and helpful ways to save time.
Countingup is the app with your business current account and accounting software in one place. With all your financial information in one place, it automates your finance admin – saving you time and stress by keeping your records accurate and compliant.
Countingup offers handy expense reminders so you’re always on top of your records, as well as an innovative receipt capture tool so you can add new expenses quickly and easily.
The app also has automated invoicing features so that you can charge customers easily. And because all your accounting information is available under one system, you can view real-time profit and loss reports to quickly and easily understand how your business is doing at any moment.
Find out more here and sign up for free today.