It has been an excellent run for the new dealership industry over the past few years. Profits were at all-time highs, and you finally figured out the business. It had nothing to do with the law of economics, where the demand outweighed the supply. It had to do with the fact that you finally put your years of knowledge together and look at the results. So, now it is time to move on to your next task.
It is time to go back to managing the company’s assets, particularly cash. Over the past few years, the amount of cash that has been infused into the business has been at an all-time high. Cash has not been an issue between the increased profits and the government programs (Payroll Protection Program and Employee Retention Credits). However, with the increased fusion of cash, there has also been increased cash distribution. I have noticed that owners who have gotten used to taking out more money have not really slowed this process down over the first half of the year; however, the profits have gone down between 20-25% for several dealerships. Based upon this, I recommend you implement the following:
- If you distribute money out of the company on a regular basis, you should have a formula based upon the profits of the company. This formula should take into account distributions required for taxes of approximately 40%. So for example, if the dealership makes $100,000 in a month, you need to consider that $40,000 ($100,000*40%) is already being distributed before any discretionary distributions.
- To preserve cash, management should turn profits to cash on a monthly basis. Each month, the profit of the dealership or a percentage of profit should be moved out of the operating account and placed into some sort of offset account. This transfer should occur before the end of the following month and if this cannot be done the office will need to explain why. So for example, if the dealership makes $100,000 during the month and you decide to move 80% of the profits by the end of the following month $80,000 (80%*$100,000) should be moved to some sort of savings account. This is a great control over cash and also ensures you will have the cash to pay your taxes.
- Owners should make sure that banking activity is reviewed by either themselves or someone independent of the individuals receiving and paying the dealership’s bills. With today’s technology of paying bills online and not getting copies of checks with the bank statement, etc., it has become more and more difficult to monitor the accounting transactions. Procedures to review both disbursements and receipts to the support should be done on a periodic basis to ensure the transactions are proper.
- All excess cash accounts should be reviewed to ensure the interest being earned on these accounts is appropriate. With the increase in interest rates over the past couple of years, earnings on excess accounts have become more important than when interest rates were at historic lows. Maximizing returns on any excess cash can become another profit center for the dealership with excess working capital.
In addition to the cash items above, it is also essential to re-address controls over other dealership assets. This would include ensuring new and used vehicle inventories and title checks are completed monthly. Make sure monthly reconciliations of parts inventory between the books and parts pad are completed and variances are investigated. I guess the point of this whole article is simple. Life has been good, and for that to continue, you may need to tighten up some controls over the assets that have not been much of a worry over the past few years.
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For more information on this topic, contact Withum’s Dealership Services Team.
