The Value of Great Accounting Records

Jeff Forsberg, Partner
Peterson Sullivan LLP

Strictly speaking, the office is not a profit center.  There is no line item on the financial statements reporting “office gross profit” or “net income from accounting operations.”  But I will posit that it is a “profit retention center.”  You may say that it’s a professional bias of mine, but the value of great accounting records is sometimes lost in how it can contribute to the overall success of the dealership. And it is a mistake to view the office solely as overhead.  An empowered office can help secure dealership profits by being proactive in the following areas:

Asset Management and Fraud

Did you know that dealerships lose 1-3% of annual sales to theft and mismanagement of assets each year?  Accordingly, the business office is trusted with the responsibility of avoiding annual losses between $350,000 and $1,050,000 (on $35 million of average sales each year per NADA).   Internal controls should be reviewed on a regular basis by management, probing constantly for weaknesses so they can be identified and corrected.  For example, the following are but a few examples of internal control procedures that should occur on a regular basis:

• Physical counts of all vehicle inventory
• Reconciliation of parts inventory (per pad) with the general ledger
• Preparation and review of the missing document report
• Review of used vehicle wholesale activity and valuations
• Preparation of a log of incoming cash receipts and subsequent tracing to the bank statement
• All balance sheet accounts supported by computer schedules, statements and/or reconciliations (remember that poor accounting records are a perfect environment in which theft can occur)

The implementation and execution of proper controls is critical, yet too often they are ignored until after losses occur.  The commitment to these efforts should be ongoing and given the highest priority. The actions of ownership and management determine how employees regard the dealership’s culture as “tight” or “loose.”  I don’t have to tell you which culture poses the greater risk to profits.

Cash Management

Watching cash is far more than counting and reconciling it. You may have heard that “cash is king,” yet cash often receives less than royalty treatment.  In any given dealership, there is probably $50,000 to $100,000 more annual income available through better cash management. You might look for it in the following areas first:

• Deposit excess cash in competitive, interest-bearing accounts, or better yet, apply excess funds against your flooring line
• Contracts should be “turned” every three days, or faster.  Vehicle receivables should not be allowed to age past ten days.
• Be disciplined with enforcing credit policies with customers to minimize bad debts
• Encourage more use of debit cards by customers
• Be strategic with the payment of vendor invoices without incurring late charges (use other people’s money if they let you) and take advantage of any and all cash discounts for prompt payment on purchases
• Defer the payment of income taxes by taking advantage of interest-free loans with IRS, including LIFO, trade discounts, and deduct prepaids for tax purposes

Compliance with Laws and Avoidance of Penalties

The automotive industry is an extremely regulated one, and this fact increases the risk of noncompliance with these rules.  Significant penalties for noncompliance can erase the efforts of the most successful dealership. For example, if you have not made efforts toward protecting customer information, fines of $11,000 per violation  can be assessed (to learn more about customer safeguards, the website is: www.ftc.gov.).  It generally falls to the office to be cognizant of what rules need to be observed, but the risk exposure warrants the focus of management as well.

Even an outline of the rules and regulations to which dealers are subject is beyond the scope of this article. For all the things dealers do correctly, there is always room for improvement in this area. I recommend that WSADA’s excellent Laws and Rules for Auto Dealers be reviewed on a proactive basis, not just when there’s a problem.  If the prospect of negative publicity from noncompliance isn’t enough to motivate corrective action, significant penalties should, which are generally not tax deductible.

Minimization of B&O tax

Dealerships regularly send Department of Revenue six figures each month for B&O and sales tax.  The state doesn’t send the dealership a bill.  Accordingly, it’s the responsibility of your business office to pay the lowest amount permissible by the rules.  Tax-exempt deals (e.g. out of state, military and Native American sales) are a significant risk to the Company because it can cost the dealership $3,000 per exempt new vehicle sale if documentation is deficient.  The rules for Washington State dealers are complex, much more than other states because Washington is the only state with B&O tax.  And don’t rely on Department of Revenue auditors to identify instances of overpayment, nor should you take comfort from the last DOR audit that gave you “flying colors.” 

Your business manager is responsible for being current with new opportunities to lower the Company’s B&O tax obligation.  And you should engage your CPA firm, knowledgeable with these rules, to review the Company’s reporting practices to gain the assurance that the Company isn’t paying more than what is required.

Efficiency & Productivity

Earlier I said that it’s a mistake to view the office only as overhead.  But something should be said about the efficiency and productivity of your office.  A larger commitment in the training of staff with Excel and Word will tap more productivity out of these tools. Regular office routines could be streamlined and management reporting could be improved from efforts to improve these skill sets. Community colleges can be an excellent place to make larger “technology investments” in your personnel.

Computer Schedules & Journals

For all the information contained in the schedules and journals, there is an unfortunate lack of review of this information by management.  If you aren’t doing it, engage your CPA firm to “look under the hood.”  The following is a short list of unwelcome surprises from such a review:

• Missing customer, vendor and employee names within the computer schedules
• Poor aging of receivables, not fully disclosed by financial statement summaries
• Manipulation of aging by reassignment of control numbers
• Aged credits from customer deposits offsetting aged vehicle receivables (an old receivable can be concealed by an old customer deposit)
• No explanations of journal entries
• Unpaid flooring on vehicles that were sold (causing out of trust potential)
• Unusual balances given the expectations of a particular account
• Unauthorized write offs of customer receivables
• “Shell game” activity with used vehicle write-downs and write-ups.

Dealer Financial Statements

The monthly dealer statement offers a wealth of information, but the value of it is enhanced when it is timely, accurate, and complete.

• Timely: The dealership financial statements should be completed no later than the fifth day of the month.  Failure to produce it timely indicates possible issues with office procedures and/or efficiencies.  There could also be a lack of proper discipline with vehicle sales cutoff.   Owners and GM’s need to “inspect what you expect,” and the sooner the better.
• Accurate:  Just as a radiologist would fail in the diagnosis of a faulty x-ray, an owner can’t take corrective action with erroneous financial data. 
• Complete:  The dealer statement is a roadmap to improve dealership profits only if the information is complete (and there is plenty to go wrong when there are approximately 500 accounts pulling across four to eight pages of what comprises the dealer statement).

The office is the nerve center of dealership operations. Treating it solely as “overhead” can marginalize the potential it offers to the dealership. And don’t let the lack of a line item reporting “office operations” on the financial statement lull you into thinking that the office can’t or doesn’t positively impact dealership profits.  It’s no accident that great accounting records often are found in the most successful dealerships.