Dealer Insights - May-June 2015 - Cash flow: the lifeblood of a dealership
Most dealerships gauge financial success by their profitability. After all, profits are what fuel owners' and other shareholders' income, enable dealerships to compensate employees generously, and allow the stores to grow and expand.
But there's another component of your dealership's finances that's at least as important as profits, if not more so: cash flow. Emphasizing profits over cash flow is like putting the cart before the horse. Dealerships without adequate cash to cover operations and overhead can run into financial trouble and, in a worst-case scenario, never even be able to realize those healthy profits that appeared like a mirage on the balance sheet.
There's good news and bad news for dealerships when it comes to cash flow. The good news is that the cash flow cycle of a dealership is unlike that of most other businesses. For example, you aren't buying raw materials to manufacture a product and then sell it to customers on 30- or 60-day payment terms, thus creating accounts receivable.
Instead, your dealership receives cash for vehicles sold from the financing bank usually within three to five days after the sale is completed. At that time, you have to pay down your floor plan line of credit for the amount you've borrowed to keep the vehicle on your lot. So, unlike a manufacturer, you don't have to worry about collecting accounts receivable from your customers in a timely manner.
But the bad news is that many dealerships get lulled into a false sense of security because of the relative certainty of the dealership cash flow cycle. As a result, they often fail to take simple steps that could improve their cash flows and their financial operations.
This can be most common in the parts and service department. Obviously, this side of the dealership doesn't operate on the same cash flow cycle as vehicle sales. Therefore, parts and service managers should follow cash flow management practices similar to those of any business that generates accounts receivable. These include:
- Issuing invoices in a timely manner,
- Producing aging schedules to see which customers are late in making payments,
- Enforcing credit policies, and
- Aggressively pursuing collection of past-due payments.
Also pay close attention to warranty receivables. Be sure to follow manufacturers' instructions and procedures to the letter when completing warranty paperwork, to avoid payment delays and thus accelerate these collections. These payments are typically made in 30 to 60 days; so if yours are stretching out longer than this, talk to the manufacturer to find out what's causing the delay.
Accelerate sales cash
In addition, there are things that can be done to accelerate your dealership's cash flow on vehicle sales. For starters, process paperwork (including the title and license) quickly. Every day that paperwork is held up is a day that cash flow is delayed. Your floor plan line-of-credit payment will be due to the bank a certain number of days after the vehicle's sale — regardless of whether paperwork snags have postponed receipt of your cash.
Also keep a close eye on inventory. Proper inventory management is always a balancing act — keeping enough of the right vehicles on your lot to meet customer demand without overstocking vehicles and paying excess interest. Minimizing your floor plan interest expense will go a long way toward boosting cash flow.
Like warranty receivables, Sales Performance Incentive Fund (SPIF) bonuses call for careful completion of manufacturers' paperwork. Delays in receiving this money will inhibit your cash flow.
Focus on flow
It's often said that cash flow is the lifeblood of a business — and this is just as true for dealerships as it is for any other type of enterprise. By focusing on these tips, you can help keep your dealership's cash flowing.
Dealer Insights - May/June 2015