There are two schools of thought when creating cash flow for a buy here pay here auto dealership. One involves selling cars as quickly as possible and repossessing them just as quickly. The other more viable option is to focus on customer service. By keeping customers in a vehicle longer, the dealer can also secure steady cash flow and support repeat customers as well as referrals. Dealers, collections staff and service technicians are all involved in the customer experience. This article reviews the benefits of a customer-centric approach to cash flow and financial management and the tools that help dealers achieve more profitable payment streams.
Build in Safeguards for Bad Breaks with BHPH Bad Customers
Not every customer will respond positively to improved customer service at a buy here pay here dealership. There will be times when some customers take advantage and eventually stop paying and communicating. Be prepared for a level of default and repossession from bhph bad customers. Build that expected percentage of defaults into your budget while focusing the majority of your efforts on well-intentioned customers who need the option your dealership offers.
Don’t assume it’s a customer issue until you explore the situation. If collections start to dip, check in with collections staff to make sure they are reaching out to customers regularly, assessing the situation and discussing payment options. At times, you may find that collections outreach is inconsistent; that is an internal operations issue rather than a customer issue. Check the call logs to determine where and when the communications process is breaking down. It may also be a matter of how collections staff are communicating with customers. In this case, you will need more training around appropriate or scripted conversations that support a positive customer response and cooperation. Collections conversations about repossession are very different than conversations that encourage a customer to get current on payments.
If your staff is unable or unwilling to work in this new model, it may be easier to replace staff and promote “new management” to encourage more customer interest and communication. This includes anyone who will interact with customers. The longer you wait to reeducate staff and get customers talking, the more likely you will lose the payment stream and deal with more repossessions.
Slower collections, however, may also reside with a dealer who is not pulling and reading reports every week — or at least biweekly. If the dealer doesn’t have the time to pull and review reports regularly, assign a back office team member to the task who can pull reports and summarize findings.
One important factor for achieving regular payment streams is how the payments are set up in the first place.
Customers in buy here pay here arrangements typically make weekly or biweekly payments, sometimes in person. Payments should be set up according to how the customer gets paid, which is usually weekly or every other week. For other customers, their income can change during the year. It’s much easier to handle a collections issue later if you are aware of how the customer gets paid, what could hinder the customer from paying and how you will resolve a cash flow issue on the customer side if and when it happens.
Meet with your CPA every month or quarter to gain insight on reporting and budgeting improvements as well as cash flow projections for the dealership. Your CPA will not make customer service calls for you or force you to design and read more accurate reports. But we can make sure the software is set up properly to provide up-to-date and helpful reports. CPAs familiar with buy here pay here can also identify the information dealers should pay attention to in a customer-centric environment.
Dealers will still have to repossess vehicles even with good customer service. So why make the switch? The simple answer is that valuation of the dealership is tied to strong collections, a well-performing loan portfolio and healthy margins. Lenders and investors consider these areas of the operation carefully when deciding to extend credit. At least one investment group we know of required a dealer to switch to the customer-centric approach as a way to improve cash flow.
If you think this approach could work better for your dealership in the long run, talk to the auto dealership team at Cornwell Jackson.
Mike Rizkal, CPA is the audit and assurance partner in Cornwell Jackson’s assurance practice and auto dealership segment. Mike utilizes his real world practical experience to provide consulting and accounting services to buy here pay here owners and managers across North Texas.