A common buzz term in corporate America is “Risk Management.” The concept of risk management was born
out of the combination of the excessive use of leverage, weak internal controls, fancy financial instruments and living in an era of instant gratification. Entire finance departments, educational curriculums, and think tanks are dedicated to this concept…but how does it apply to Auto Dealers?

Let’s find out.

Structure and Systems
Behind something that is done very well is a great “system.”  Think Disney World, The Four Seasons Hotel and Starbucks.  They insist on having competent, well-trained people, but the key to their success is uniform processes and procedures.  If it is important, put it in writing, train everyone involved, inspect against the guidelines and be sure to follow-up on all exceptions. The goal of all systems is to be process, not people dependent.

Financial Reporting
A common issue that has many negative consequences is “messy” books. Monthly control and validation of all balance sheet accounts is a critical function to the proper operation of a dealership and to accurate reporting of profits. This sounds basic, yet time and again, this is lacking and there are negative adjustments needed to get accounts in balance.  There needs to be a clear line of responsibility for each account from the perspective of both the office personnel and the department manager. The account schedules should be reviewed monthly by the office and problems should be reviewed with the department heads. A plan to resolve any aged or incorrect balances should be determined and equally important is ensuring that the processes in place are adjusted to avoid reoccurring problems. The risk is that your profits are overstated, your bonuses and commissions are not accurate and you make business decisions using the wrong information…not where you want to be!

Cash Controls
The old risks are as scary as the new risks.  Strong cash controls are always important. You should be sure that cash accounts are reconciled daily via online banking. One person reconciles and another periodically reviews. Additionally, the process for handling and accounting for cash receipts (cash, checks and incoming wires) should be reviewed to ensure that duties are properly segregated.  Cash disbursements can be efficiently reviewed through the cash disbursements journal. The back-up for any checks or outgoing wires that you aren’t familiar with should be analyzed.

Debt
It is only the very savvy who can overuse debt to their advantage. The rest of us are better off with adequate capital in each investment we make. The term “skin in the game” exists for a reason. Today, it is tempting to load up on cheap debt. Yet, there are caution signs all around. With interest rates slowly rising and asset prices (again) at near highs, it is time to map out a path to pay down existing debt and the proper criteria for taking on new term loans and mortgages.  When you aggressively pay down debt, you know where your cash is going. Do you know exactly how excess funds will be used when they are left in your checkbook?  Bottom line…it is hard to go wrong paying off debt. Ben Franklin said, “Creditors have better memories than Debtors.”

Aftersell Department
Ever-shrinking margins from new and used vehicle sales have led to an emphasis and reliance upon aftersell revenue. A review of your sales practices, compliance and rate of product cancellation should be performed periodically to avoid surprises. Consider a standard monthly reserve to account for potential customer refunds and third-party chargebacks. Also, review the assumptions utilized in building reserves for any self-insured products. Finally, what controls are in place and who checks to see that charges taken against reserve accounts are appropriate?

Cybersecurity
Would you be shocked if you had some sort of security breach in the next few years…unfortunately, probably not.  However, you would be upset if the issues could have been avoided. Not having a basic data and cybersecurity assessment performed by an independent I.T. professional is a risk that can be managed. It won’t prevent all possible problems but it will likely reveal a few key “holes” in your I.T. security that can be quickly and inexpensively closed. We can assist with this one.