Todd Merriam Manager, CPA
28 March 2019
During tax season, we are fortunate to have the opportunity to visit and meet with our dealership clients. These visits allow us to see both the challenges and achievements that dealers have faced throughout the year. It also allows us to see the direction in which the dealerships are heading and how they are planning for the future.
During these visits, some dealers expressed concern about their cash balance. Despite the fact that most of these dealers were experiencing a profitable year, they felt their cash-in-bank balance seemed lighter than it should be. After looking at the dealerships’ monthly bank reconciliation and noting it was reconciled, I reviewed the receivable schedules out of the dealership’s management system. This included analysis of significant receivable accounts, such as manufacturer warranty and incentives. After my review, it was quite apparent that in these situations the dealerships were behind on the collection of manufacturers’ receivables, which was impacting cash.
To solve the issue, I conducted meetings with a cross-function of dealership personnel including the owner, office manager, sales manager (rebates) and the service manager (warranty). In these discussions, the root cause of a collection issue was identified and a plan to resolve it was discussed. What surprised me the most about these meetings was when I asked the question, “How often do you meet to discuss receivables?” Surprisingly, the answer from these dealerships was “rarely.”
From our experience, dealerships with “clean” receivable schedules typically meet regularly to discuss receivables and develop a solution to collect aged items. These meetings include not only department managers and ownership, but also the office manager. In addition, best practices suggest that the accounting office should produce a “heat sheet” containing information on aged receivable balances to ensure that management is aware of exactly what is outstanding. By creating an environment that fosters communication about the status of receivables, managers remain aware of specific items that they need to work on collecting and it provides ownership with the knowledge of the areas that need their time and attention.
To enhance communication, dealerships should set a goal to have managers and accounting meet at least weekly. Receivable schedules should be reviewed in an aged format. Anything that exceeds a manufacturer normal pay cycle (weekly or monthly) should be reviewed and the responsible manager should be held accountable. Most dealerships have weekly sales meetings; therefore, it would make sense to hold your collections meeting right after.
When a receivable becomes aged, it requires much more time and effort to collect, and it results in an increased likelihood that it will need to be written off. When a receivable is booked, someone at the dealership has made a sale and has been paid on the gross from the sale. Therefore, failure to consistently review receivables can cost a dealership much more than just the amount of the receivable itself. Unfortunately, when cash becomes tight due to collections, everyone in the dealership will continue to be paid except for the dealer principal, whose compensation is largely based on free cash flow.
By fostering an environment that stresses the importance of collections, receivables will be closely monitored and less likely to become aged. This will help dealerships avoid the dreaded cash crunch and stay liquid. The only cost to meeting regularly on receivables is time, but it’s a small price to pay to keep cash flowing in the long run.