As an auto repair shop owner, do you ever run into issues with not receiving full payment for some jobs?
Short pays, when applied to the auto repair industry, are typically referring to when a client’s insurance pays a certain amount for warranty work that you charge more for. Because of this, the invoice is only partially covered. What do you do then?
Some people suggest balance billing, meaning that you bill your client for the difference between your charge and their insurance’s covered amount. However, after more than 50 years of working with auto repair shops, the experts at CSI Accounting & Payroll don’t advise balance billing, and we don’t know of anyone who does this.
In this article, we cover the route that we suggest to tackling short pays - without balance billing.
The Types of Repair Jobs to Accept
Instead of performing balance billing on warranty work, we recommend our clients go a different route. If you’re not a collision shop or a dealership, we don’t encourage our clients to perform warranty work. You can suggest a prospective client look into collision shops or dealerships that may be able to serve them instead.
The exceptions to this rule are when you don’t have other jobs coming in the door or when the warranty job is a loss leader, meaning the client may then come back for more profitable work in the future.
One of the principles that we try to teach our clients is the difference between good money and bad money. The pay rates are fixed by the client’s insurance, and we’ve found that short pays from insurance are common. Warranty jobs have low profit margins and therefore reduce your overall profit margins. They eat up your work space and your mechanics’ time that could have been used for more profitable jobs.
If you do still find yourself performing warranty work on occasion, the following sections are for you.
Why You Should Document the Loss
You can choose to keep track of the loss amounts from each warranty job. There is no write-off, and this will not help you tax-wise, but it monitors how much money you’re losing.
This encourages you to make some changes in the types of jobs you accept. Once you start accepting warranty work, you may find yourself developing a reputation and attracting more of it.
Not to mention, if you’re not recording the short pays in your books and are instead showing that there is no balance due, then there is no documentation of the issue.
How to Document the Loss
Here’s how you can keep track of the loss amounts from each warranty job. Since insurance coverage of warranty work is almost always lower than what auto repair shops charge, you will need to document these jobs differently on your financial statements.
The process is simple; you should account for the entire job at your price and then discount off the difference between your price and what insurance will pay. Again, if you’re doing this correctly, there is no tax benefit, but this helps show how much work you gave away.
For example, if the normal job is $1,000 but insurance only pays $800, you should show $1,000 in revenue and $200 in discount expense so it evens out to the $800.
Optional: Make Client Aware
When you note the loss, you can choose to make your client aware of the issue and the amount that their insurance did not cover. Many auto repair shops will skip this part, but informing your client can be beneficial to both of you.
Make Client Aware of Coverage
By letting your client know that their cheap insurance can result in jobs not being fully covered, they can choose to increase their coverage. Make sure they know that the issue is not exclusive to your shop, and they may run into it time and time again with other shops if they don’t increase their coverage.
Providing this advice also may help you become a top choice for future paid-in-full repair jobs because you’ve shown you’re an expert who can be trusted.
Transparency With POS or Invoicing Systems
We’ve heard of repair shops wanting to show breakdowns of item costs for transparency reasons - to gain trust from the client and thoroughly show where their coverage is lacking.
However, the process of showing the amount discounted varies by your POS system. Some items are taxable, and some are not - so you can’t do a blanket discount on the total without changing the sales tax implications. Theoretically, you could have 10 discount lines; it just depends on how your system works.
We have yet to see an industry software that breaks all of this down, but some systems that our clients use include Mitchell1, Napa Tracs, and RO Writer.
Avoid Awareness Through Balance Billing
If you did ask the client to pay the difference, you would still risk not receiving payment, and you would also risk not having them return for future jobs that may be more profitable. The whole point of a warranty is that the client doesn’t have to pay for things that are covered by the warranty, and asking for payment on top of that likely won't receive a positive response.
Again, we don’t recommend balance billing - and you may face restrictions on it.
Get More Advice From an Auto Repair Shop Expert
There’s good money, and there’s bad money. If you’re not receiving full payment for warranty jobs, our first general recommendation is simple; don’t accept warranty work.
If you do accept warranty work and face short pays, we don’t advise balance billing. Instead, document the loss for your own records and consider showing the loss to your clients to help them make better-informed insurance decisions in the future.
If you’re seeking guidance, a monthly accountant can work with you to help track your losses and show the revenue you could be making if you switched to a higher profit margin model.
Not to mention, CSI Accounting & Payroll offers advice specific to auto repair shops, such as labor rates, what to charge your clients, the right parts-to-labor ratio, how much you should be doing each day to be profitable, and whatever else we can help you with! Click the button below for a free consultation.
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This article was composed by a member of our staff who interviewed our experts to get the facts straight. Any uncited information found here came straight from a knowledgeable accountant or payroll specialist.