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Dealer Insights - January/February 2012 - 3 Ways To Keep the Cash Flowing

Business owners know the importance of having sufficient cash on hand to meet daily needs and obligations. Here are three tips for managing the flow of cash at your dealership.

1. Stay organized  

Maintaining an organized system for cash accounts is essential to strong cash-flow management. Keep at least two bank accounts — one for general funds and one for payroll. With Internet access to bank statements, your accounting department should reconcile the accounts daily for timeliness and precision.

Small daily overages and shortages aren’t uncommon. Set aside any discovered variances in cash deposits each day in a separate general ledger account. Review and reconcile this account monthly, too.

A large percentage of cash can come in through contracts-in-transit. Maintain only one general ledger account for these transactions. Any division of this account allows for additional, unnecessary entries and greater room for error.

2. Keep the lid on inventory 

Your dealership’s largest operating asset — your new, used and parts inventory — demands your ongoing 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.

Then delve into inventory aging. Each 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. As a last resort, wholesale or auction 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.

Closely monitor nonstock (special order) parts to ensure they’re billed out on the corresponding repair orders. If these parts go unused, use your manufacturer’s parts return allowance to get rid of them.

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. If unordered vehicles — especially trucks (given their low marketability right now) — show up on your lot, send them back to the factory.

3. Be quick to collect 

Collecting money due to you is crucial to cash flow. To free up cash, process a sale as soon as possible. Collect all contract balances within five days and investigate all credit balances. Time lags can tie up a large amount of cash. And, remember, the “true worth” of accounts receivable worsens as time passes.

You can determine the average time it takes for funds to be received and when floor plan payments are due. Three to five days is the benchmark for processing contracts in transit. Strong management and the use of checklists will minimize errors leading to funding delays.

Closely monitoring receivables can help free up cash and save you money in the long run. Your computer system likely lets you print summary receivable reports so you can thoroughly review account aging.

You can keep an eye on receivables through a few simple activities. Exception reports can print out all receivables more than 30 or 60 days old. Generate these reports weekly for department managers to review and clear. Maintain an updated list of the 20 oldest receivable balances, indicating the customers’ names, amounts owed and current collection status.

Also, institute a credit policy that authorizes a maximum of two or three people to approve credit limits for commercial accounts, establishes clear credit restrictions and sets up an aggressive collection program.

Last, hire a top-notch warranty administrator. Aim for a three- to five-day time span between submitting a claim and getting paid.

Ample cash on hand 

Even in a tarnished economy, good management can keep cash flowing. Begin with an organized system of cash accounts; then keep your new, used and parts inventory in tow and, finally, maintain a tight collection policy. While it’s impossible to anticipate every receipt of income and every expense, your steadfastness can ensure that you have ample cash on hand to meet your daily business needs, obligations and goals.

Dealer Insights – January/February 2012 

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