UNDERSTANDING… CAPITAL, REVENUE AND OVERHEAD
UNDERSTANDING… CAPITAL, REVENUE AND OVERHEAD
If you are an owner/operator, equity partner or a general manager, ask yourselves the following questions:
1- Are you informed about your company’s cash position on a daily, weekly, monthly basis?
2- Do you know if you are properly capitalized?
3- Are you aware of your “frozen capital”?
4- Do you know what your real revenue is?
5- Are you concerned about your “overhead”?
6- Does your controller/business manager constantly juggle with your bank account?
“I am short $500,000 in our bank account today, can you please write a check…”
I know most of you owner operators have been in a position where you walk into your office one day and your controller walks in and says “I am short $500,000 in our bank account today, can you please write a check…”. You stare back
with a look of complete shock in your eyes and respond “what do I look like a bank?”
Often times we are too busy harassing the sales managers for not having enough business, hiring and firing employees for non-performance, asking service manager why the gross profits are so low or questioning the business manager for excessive spending; all of which are legitimate concerns.
However, understanding revenue and cash flow, working capital, frozen assets and overhead have just as much if not a greater impact on your store’s livelihood and state of health as all of those concerns.
Don’t know the answers to these questions?
The trouble is, most of us don’t really know the answer to these questions.
Well, let’s give it a thesaurus try.
Revenue, is often times confused with cash. Everything that your company generates in sales is translated into revenue and gross revenue. However it is only considered cash when it is collected or considered collectable. Unfortunately in car business we sometimes set ourselves up for confusion and then are disappointed when someone tells us that we need cash and we say” what about all the profits we made?” Because we easily forget that:
1- Inventory preloaded with products that are charged out on internal tickets are showing as gross revenue but they are really sitting on our lot and not cashed out.
2- Contracts in transit, Customer receivables, pick payments until they are collected are still considered gross revenue but not cash.
3- Aged wholesale receivables, aged parts receivables, aged warranty receivables are all showing up as gross revenue but is not cash and may never be cash.
4- Pre-paid expenses are sitting on the asset side of your balance sheet and are considered a part of your Net working capital but in reality they are not assets, they are expenses that did not hit your P/L yet.
5- All of your inventories in your current assets may not retain their book value; the difference when written off will also decrease your cash flow.
The list goes on. The point is if you do not want to be surprised with cash flow problems, you must have a comprehensive daily cash report that takes into consideration the following:
• Your daily bank balance
• Outstanding checks and deposits
• Contracts in transit
• 10 day receivables
• Flooring due
• Sales tax due
• Payables due 10 days
Additionally every month you should receive a report from your business office of all the doubtful accounts that may not be collected. Your accrual accounts, prepaid expenses and all of your schedules also must be periodically cleaned up to reflect a clear picture of your net worth, net cash and net working capital.
Regarding overhead, you should understand that overhead is every penny necessary to spend to run a healthy and profitable business, one of the dangers is that overhead sometimes is confused with excessive spending and causes decision makers to cut cost which becomes a detriment to run their business efficiently. Therefore extreme caution must be taken when making cost cutting decisions.
In this time and age of automotive retailing managing you “Balance Sheet” is just as critical a job as it is to generate Revenue. I would recommend all decision makers to allocate reasonable time to understand the financial state of their businesses.
As always for all questions and concerns we are only an e-mail or a phone call away.
Stay personally and financially healthy,
Arlan