IS YOUR PROFIT SITTING ON YOUR LOT?
Understanding why it’s still sitting there.
Whether you are an owner or a conscientious general manager, one of your primary focus areas should always be your cash flow. Inherently creative GMs will find ways to inflate profits since their compensation largely depends on bottom lines.As an owner, or a fiduciary, it is important to know that the profits that are reflected on your statements are real and not just number games that might end up biting you back when you have a book audit or vehicle inventory evaluation. There are conspicuous tell-tales for some of those areas that you must constantly monitor to avoid surprises.
Earlier this year we mentioned the importance of understanding balance sheets of your financial statement. There is only one way to effectively monitor changes on the balance sheet. You must ask your controller or business manager to build a “Trend Report” for the balance sheet. This will allow you to see every month how certain accounts are fluctuating from one month to another. In Other words you would be able to see if your vehicle or parts inventory is growing for no reason. If you have accrual accounts are they reconciled to the accrual matrix that they are structured with.
Let me be specific. One of the ways to increase service profits quickly is either to add some pre-installed items to inventory vehicles or institute a “recon fee / vehicle prep fee” that gets charged to each internal ticket for the inventory vehicles. While this will increase your service department profits and consequently the dealership’s gross and net profit, in reality you would be increasing the cost of your inventory which is sitting on your lot and not converted to cash yet. This is one way of creating cash shortages or need for an increase in working capital if the vehicles are not turned fast enough.
Another example would be if your are accruing for certain anticipated expenses throughout the year such as legal and accounting expenses, physical inventory expenses or if you have a vehicle reserve “pack” that gets front loaded and kept in an accrual account to be brought to profit when the vehicle is sold. While these are all good tools to control expenses and increase gross profits, they are also haven to conceal unauthorized spending. In either one of these examples there needs to be a monthly report in place which reconciles these balances so that nothing else other than the intended purpose is swept into these accruals to off- set irrelevant expenses. In the event of vehicle reserve accruals, you must make sure that no additional amounts other than that of sold units are brought into income artificially.I hope that by now, since I started talking about the relationship between balance sheets and profits, it is more evident for you to pay closer attention to your dealership’s record keeping practices. Please visit our web-site for more information or better yet give me a call for a complimentary consultation.
See you in June.
Phone: (310) 717 1876
Fax: (310) 883 0019