LGT's Profit Sense

The COVID-19 pandemic has created an economic downturn of a severity seldom experienced in our nation. Many businesses, including dealerships, have turned to government and business loans to help keep them up and running. But there may be other sources of cash, right in your own business, that also should be explored.  

Payroll is a deep well  

The largest expense category for dealerships is payroll. With so many dollars at stake, you’re bound to find some inefficiencies. As one measure, you might consider creating, or revising, pay plans for fairness and effectiveness to achieve your dealership’s objectives. For example, you might consider a pay plan for the sales department based on the number and type of vehicles sold in a given month. 

During other downturns in the economy, such as the Great Recession, you might have looked to cutting staff to control costs and free up cash. But factors to consider in such a decision in the COVID-19 era are different. For example, if you’ve participated in the Paycheck Protection Program (PPP), you have until December 31 to restore any employees you laid off or furloughed to get the full-time-employee (FTE) counts you need for full loan forgiveness. So reducing staff may be an even more difficult decision to make than it usually is, knowing that government dollars are at stake. 

Managing inventory is key 

Your dealership’s largest operating asset — new, used, and parts inventory — deserves attention. First, address control issues. Count inventory on a regular basis and compare physical counts to accounting records. Locate missing, damaged, or inaccurately priced items. Implement and enforce internal controls to limit opportunities for employee theft. Performing regular inventory counts can also be used to help identify any aged or slow-moving inventory on your lot as well. 

Then delve into inventory aging. Every day a vehicle sits on your lot, it incurs floor plan interest, rent, insurance, and security expenses. Identify slow-moving vehicles. Chances are, manufacturer floor plan assistance has run out.

Discount the price or offer in-house incentives to move these vehicles. 

Consider rearranging the layout of your store’s lot so that these slow-moving or discounted vehicles are closest to the frontline, which will make them visible to potential customers. As a last resort, you might consider either wholesale or auctioning off the vehicle. 

Parts inventory also drains cash and risks obsolescence. In a pinch, a nearby dealership or a local parts store can supply your imminent parts needs. So, keep your inventory as lean as possible.  

One parts reduction opportunity is a factory parts return program, which allows dealers to return certain unused parts to the manufacturer within a limited time frame. Also beware of factory pressure tactics. For example, your parts and service representative earns a bonus for meeting quotas and may try to sell you excess inventory.  

Finally, formalize your ordering policies. A limited number of individuals should be authorized to order inventory. Tie the pay plans of these employees to inventory benchmarks, such as inventory turnover rates or costs per vehicle.  

Receivables add up 

Your balance sheet also might contain untapped sources of cash. For starters, many dealers leave money on the table by neglecting amounts owed to them by manufacturers, banks, wholesalers, and customers, such as contracts in transit.  

Unless a customer pays with cash, dealers don’t actually receive cash from a sale until all the paperwork is completed and approved. Finance companies generally submit payment within three days of approving the loan application, trade-in forms, and other sales documents. If your average is longer, consider creating a checklist to help salespeople remember all the requisite paperwork and, perhaps, withhold commissions until the dealership receives cash.  

When contracts in transit remain outstanding, the dealership is still responsible for its obligations, including paying down the floor plan and trade-in liens. This timing differential between cash inflows and outflows can temporarily strain cash, so it’s imperative to stay atop collections. 

By not keeping up with collections and paying off related obligations (such as floorplan), you may be putting yourself at risk with your lender or other vendors. 

Often your biggest debtor is the manufacturer via factory receivables. It may owe you for such items as warranty claims, holdbacks, rebates, and incentives.  

Obtain an aging schedule and watch out for factory receivables older than 45 days. Aged balances may foretell administrative slack or mounting write-offs, which may be due to poor record retention or lenient service department policies that could prompt the manufacturer to initiate a warranty audit. Incorporating strict guidelines and maintaining sufficient back up for these receivables will be key to controlling write-offs for your dealership. 

In survival mode