There's an old joke about accountants: A car dealer is interested in hiring a new controller. He sets up interviews with three candidates.
The first applicant arrives and the dealer says he has only one question: "If I have three dollars of revenue and two dollars of expense, how much profit have I made?" The candidate quickly responds, "You made one dollar profit." The dealer says thanks for your time and sends the guy on his way.
The second candidate gets the same question. He looks at his worksheet, then looks at the dealer. A light seems to go on over his head and he says, "Three dollars in revenue and two dollars in expenses. Mr. Dealer, you've made two dollars profit." Candidate number two gets sent packing.
The third applicant hears the question, looks at his worksheet, looks at the dealer and then smiles. The applicant says, "Three dollars revenue and two dollars expense - how much profit would you like to make?" Candidate number three gets hired on the spot.
Now here's a question that should take you back to your introductory Economics or Business Management courses: "What is the purpose of a business enterprise?"
Anyone who answered, "to maximize profits" should go to the back of the class for a while, or, better yet, talk to your accountant.
The real purpose of a business is "to maximize cash flow." Profit is just a creation of the accountants and should not be confused with cash.
Cash is King
As the saying goes, "Cash is King". No place is this saying more prevalent than in the automobile dealership. Stringent working capital requirements from financial institutions and the manufacturers put considerable strains on a dealership to maintain the required working capital. Rising expenses, such as floorplan
interest, insurance and utilities, to name a few, have put additional pressure on cash in dealerships. The turn of a dealership's profits to cash is essential to meet factory and bank guidelines on minimum working capital and net cash.
Management of the balance sheet of the dealership is the key to turning profits to cash. Reviewing the dealership balance sheet is the "roadmap" to determining where profits of the dealership have gone. The following are questions to ask when reviewing the balance sheet.
Accounts Receivable - Have receivables increased? Has significant credit been extended to parts, service and body shop customers? Have terms been extended? Who authorized the increase in credit and terms? Have factory rebates and warranty claims been applied for improperly or have denied claims been resubmitted? Are finance reserves being held in excess of reserve requirements?
Parts and Miscellaneous Inventory - Has an investment been made in parts inventory? Are stock order allowances being maximized? These days, parts can be ordered and delivered in days. As a result, parts inventory should remain relatively consistent throughout the year. Any significant fluctuations should be investigated immediately.
Work-in-process should be reviewed weekly to ensure repair orders are closing timely and that technician pay is being allocated to repair orders properly.
Prepaid Expenses - Are expenses being held up on the balance sheet and not expensed? Sometimes expenses will be spread over several months rather than impacting operations with significant expense fluctuations. However, if these
expenses are not expensed ratably or if too many expenses are being spread, profits may be distorted resulting in higher profits than actually incurred.
Capital Expenditures - Has the dealership
expended cash on equipment, furniture and fixtures or improvement to the facility? Although there may be a hesitancy to finance capital
expenditures, strict working capital guidelines and the need for significant capital to run a dealership should at least put the option of financing or leasing on the table. Because computers and equipment do become obsolete so quickly, sometimes leasing helps in managing cash flow. Major
improvements and renovations should be financed so you can keep cash in the dealership. It is easier to pay down on money borrowed than having to go to a bank when cash is getting tight looking for financing.
Accounts Payable - Have your payables been paid down because your office does not like getting phone calls from vendors? The only vendor you should be paying upon receipt of invoice is your accountant of course. You should be extending your credit as much as possible? If your vendors allow you to pay in sixty days, then pay in sixty days rather than thirty days.
Floorplan liabilities - Management of inventory is probably the most important factor in cash flow management. Managing your floorplan is just as important and often overlooked. Is some of your used vehicle inventory being curtailed? If inventory is not turned, curtailments can become significant very quickly.
Owners' Accounts and Inter-company
Accounts - The owner's receivables and payables are always the best to review. Although a dealer will never forget when he or she puts money into the dealership, they tend to have selective memory when it comes to reviewing the money that came out of the store via the loan accounts. The bottom line here is that these accounts should be reviewed to determine how much did come out and also to determine if it may be an expense of the business and should not be charged to the owners' account.
For those dealerships with multi-points, the inter-company accounts, if not controlled, can become a black hole for cash. They can cover up for a poor performer and skew just how good a strong performer is. If possible, inter-company transactions should be treated like a transaction with any other normal customer and vendor and payments should be made monthly to clear the balances. If inter-company accounts are used to bankroll certain stores within a group, separate accounts should be used to clearly identify the fact that transfers between stores are occurring. These transfers should also be approved by the dealer.
Ray Lofstrom is a principal with the dealership accounting and consulting firm of O'Connor & Drew, P.C., 1515 Hancock Street, Quincy, MA 02169. He can be contacted at (617) 471-1120.