Posted on Apr 3, 2018

In the life cycle of any auto dealership, there will be times when cash flow is tight. Buy here pay here dealers in particular face complexity to ensure enough inventory is on hand to attract buyers — and offset that investment with a healthy flow through collections and debt management. This balance is never perfect. Dealers need strong banking and/or equity relationships that will extend credit to fill in the cash flow gaps.

Debt Management is Proactive

Even if their balance sheet is healthy, dealers on the shy side of $1 million in receivables will likely get a less favorable interest rate on credit than more established or larger dealers. This does not mean that smaller dealers should accept rates of 10 to 15 percent. It pays to shop around and to understand how the bank or private equity firm will consider the characteristics explained above to justify their terms.

By working with your CPA, you can provide the lender with financial statements and accounting that aligns with their expectations. As part of the terms of the loan, dealers may be required to provide reviewed or audited financial statements. Because of this additional expense and also to get more favorable terms, it’s important for dealers to actively seek lower interest rates. It is perfectly acceptable to shop around. Contact competing banks as well as your existing lender and ask about new credit options. Talk to colleagues about the banks they are using. Request multiple offers.

Strong accounting, tax and compliance practices help with this process. On the accounting side, owners need regular financial statement preparation to view trends and forecast cash flow — helping them prepare for lending conversations and extensions of credit at the right time each year. On the tax side, the number one tax planning technique for buy here pay here dealers is the discount (or loss) on the sale of notes from the dealership to the RFC, which requires cash. Dealers may also qualify for opportunities such as bonus depreciation and deductions with regard to employee perks and compensation.

Management may also consider a review of operational efficiencies or gaps in controls that can affect cash flow. Keep in mind that every dealership is different when it comes to managing cash flow, so best practices must occur within your own dealership.

As buy here pay here dealerships grow to portfolios of $4 million and above, more favorable financing opens up. But it’s not a guaranteed scenario. Dealers should weigh the benefits of obtaining more financing against the extra administrative costs of public accounting services.

Once you have the credit you need, there are various ways to reinvest in your business. Some dealers may decide to purchase their location — adding real estate holdings that support the extension of credit in the future. If the dealership also has a service department, cash flow can be set aside to cover repairs and maintenance on recently sold cars. Some dealers choose to cover repairs on cars shortly after purchase in order to support the customer’s ability and willingness to keep making monthly payments. For example, a repair may cost $800, but it leads to another six to 12 months of customer payments.

Compensation is another area that cash flow can support. Attracting and keeping good back office personnel supports collections, which in turn supports the business. Dealers may also consider additional compensation for good salespeople.

Let’s say you’ve done as much proactive management that you can. At certain points in the life of a dealership, you will still experience challenges. Some of these challenges can’t be handled alone. Whether you’re with a big bank and have secured a favorable interest rate or your dealership is still considered high risk for lenders, don’t ignore cash flow problems. Your CPA can help you formulate a plan to show numbers and communicate effectively with lenders in a way that is focused on solutions rather than the immediate problem. Lenders don’t like to call a loan for a short-term issue, and there is usually room for negotiation on loan modifications that will support cash flow as well as repayment.

However, year-over-year problems make lenders less willing to keep taking a risk on default. As soon as an issue comes to light, prepare your strategy to keep a strong lender relationship. Work through it like you and your lender are on the same side.  It’s in the best interests of you and the lender to find a solution.

Debt Management Supports Valuation

It is also in the best interests of the dealership long-term to show a consistent history of loan financing, healthy cash flow and debt management. Owners want to show a return on investment and consistent profitability, tied to valuation of the business.

There are different approaches to valuation. A key component, however, is determining equity value, which is the market value of the dealership assets minus the market value of its liabilities.

Assets include such things as the dealership’s auto inventory and fixed assets including real estate. They can include intangible assets such as the goodwill value of the dealership’s name and location, sales and service agreements, and also synergies such as multiple locations and strong management.

Liabilities will include debt, any excess compensation, tax and rent issues, inventories and contingent liabilities such as environmental issues related to the storage and disposal of fuel, oil or batteries.

The bottom line is that a well-performing portfolio, a good location and healthy foot traffic — combined with properly managed debt — will be attractive to a potential buyer. A dealership that is attractive to lenders is also attractive to buyers or outside investors, even with debt factored in.

If your dealership struggles with debt management or cash flow either intermittently or throughout the year, don’t let it hinder opportunities to grow. Talk to the team in Cornwell Jackson’s auto dealership practice group. They will help you understand the proper structure of financial statements to support proactive lender conversations.

Download the Whitepaper: Use Debt to Increase Cash Flow

Scott Bates is an assurance and business services partner for Cornwell Jackson and supports the firms auto dealership practice. His clients include small business owners for whom he directs a team that provides outsourced accounting solutions, assurance, tax compliance services, and strategic advice. If you would like to learn more about how this topic might affect your business, please email or call Scott Bates.

Originally published on February 29, 2016. Updated on April 3, 2018. 

Posted on Feb 20, 2018

The average used auto dealership operates differently today than it did prior to 2008. Although margins can be healthier for “buy here pay here” dealers than for market rate dealers, accounting for these dealerships is complex. And cash flow is a constant concern. Dealers must balance inventory investment with collections. Yet, receivables alone don’t support healthy cash flow.

Receivables Rarely Keep Lights On for Auto Dealerships

There are two common scenarios that lead to buy here pay here dealership cash flow problems. Some dealers focus too much on buying vehicles, tying up their cash in inventory and experiencing a lag between car sales and collections. For the dealerships that try to balance inventory investment with receivables, it is difficult to sustain cash flow due to the car financing default ratios. Until they reach a certain size, dealers don’t collect enough in receivables alone to support regular investment in inventory, coverage of overhead or anything else.

If the dealership has common ownership in a related finance company (RFC), then there is the additional burden of ensuring the RFC has enough cash on hand to pay the dealership for the vehicle at the time of each financing transaction. In a previous article, we explained that RFCs allow dealerships to work with consumers who have little, no or bad credit. The consumer is able to finance a car through the RFC, separating the dealership from direct payment collections and other potential liability. The dealership collects cash up front. The RFC earns the income as it is earned from the car buyer’s payments.

Whether dealers are focused on inventory, receivables or expanding their transactions through RFCs, they will typically experience gaps in steady cash flow without some type of debt or equity contribution. A secure supply of cash flow requires regular management and vigilance as well as education around how to develop a healthy banking relationship. But there are appropriate ways to use debt (credit) to support cash flow while maintaining a healthy balance sheet.

Healthy Dealers Get Credit and Increase Cash Flow

It stands to reason that dealerships with good access to credit are considered healthy among other lenders or equity groups. They tend to have several things in common:

  • Good location: Geography still matters in this industry, so lenders or investors will consider the physical location of a dealership, its longevity and the size of the city to support extension of credit.
  • Good traffic: Traffic counts around the dealership will support projections of customer walk-ins, brand visibility and expectations for sales volume.
  • Strong collections: The proof is in the numbers. Dealerships must show an emphasis on receivables directly as well as through an RFC. Unlike the IRS, however, lenders and investors will view the dealership and RFC as one entity when extending credit to one or the other.
  • Well-performing loan portfolio: Although the industry standard is that just 10 percent of notes will survive the entire term, dealers must show that the majority of the portfolio is performing. Of course, recent notes are considered healthier than notes extending into year three or four when customer defaults and refinancing tend to occur.
  • Healthy margins: Lenders and investors want to see a profit margin year over year in the dealership and the RFC.

If your dealership struggles with cash flow either intermittently or throughout the year, don’t let it hinder opportunities to grow. Talk to the team in Cornwell Jackson’s auto dealership practice group. They will help you understand the proper structure of financial statements to support proactive lender conversations.

Scott Bates is an assurance and business services partner for Cornwell Jackson and supports the firms auto dealership practice. His clients include small business owners for whom he directs a team that provides outsourced accounting solutions, assurance, tax compliance services, and strategic advice. If you would like to learn more about how this topic might affect your business, please email or call Scott Bates.

Originally published on February 7, 2016. Updated on February 20, 2018. 

Posted on May 31, 2016

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.

Download the Whitepaper Here: Customer Service: A Better Approach to BHPH Cash Flow

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.

Posted on May 10, 2016

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 efficient financial management and the tools that help dealers achieve more profitable payment streams.

All dealerships need an effective way of tracking the number of customers they have and current level of collections. If customers are behind on payments, then dealers need to know the level of delinquency to prioritize which accounts need attention first. Again, the longer a delinquency is left unchecked, the more likely you are to lose that customer and default to repossession.

There are several software packages that support dealership efficiency, including but not limited to AutoStar, Finance Express/Dealer Socket, Frazer and Dealer-mate. The software must be used properly and regularly for a customer-centric approach to succeed. In a repossession approach, dealers simply wait for legally sanctioned delinquency. In a customer-centric approach, dealers must look at reports weekly. They will look for signs of changes in payment streams, then communicate with collections staff who must reach out to those flagged customers.

Once collections improve, the reports can tell dealers how to improve budgeting, track inventory and monitor related finance company (RFC) reimbursements (if applicable). The software can also be tailored to provide reports to the dealership that are most meaningful.

Some of the reports and elements of reports that dealers should pay attention to include:

  • Inventory Listing

This keeps track of cars available for sale. It should include the purchase price at the cost to dealer plus an amount for make-ready costs (expenses incurred to bring vehicles up to selling condition). Many dealers affix a standard cost to apply to vehicles to make them ready for sale based on historical trends. Some do try to assign exact costs, but the recordkeeping for this can be cumbersome. A compromise would be to use the standard cost for most vehicles and add large, specific make-ready expenses if applicable.

The inventory list is also used to reconcile against the lender’s floorplan records. While the dealership’s profits are primarily earned through interest, maintaining appropriate inventory costs (by not overpaying for inventory) is still a critical piece for a healthy dealership.

  • Accounts/Notes Receivable (dealership’s portfolio)

Dealers should keep track of all open accounts and note the accounts that are past due. This report can also separate the components of the loan between the principal balance, current balance, accrued interest, sales tax, and discounts – original and current.

  • Charge offs

After reviewing the A/R reports, this report gives the dealer a list of every account that will no longer be collected. This is useful for year-end reporting, as the IRS requires Form 1099-C (cancellation of debt) to be issued to these customers. The penalties for noncompliance here are steep, so it’s worth it for the dealer to keep accurate records.

Some dealers only move a small portion of their loans to the full charge-off stage, as issuing these forms can drive away potentially good future customers. If you don’t expect (or want) the customer to return, consider a full charge-off.

  • Cash Flow Report

This is different from the cash flow statements included in GAAP financial statements. This is a report out of the dealership’s sales software that shows the amount received from customers. It will separate the payments between down payments, interest, principal, sales tax and unearned discount. Some dealers keep track of their cash flow by the number of open, current accounts. For example, if they have 100 current accounts paying $400 per month, they know they should be receiving $40,000 per month. This can even be broken down bi-weekly or weekly depending on the dealer’s needs.

This report also helps track the payments to the actual bank statement and can be reconciled with the monthly expected cash flow receipts from the account/notes receivable report.

  • Sales Tax Reports

These are compliance based, but are important. This report keeps track of sales tax due. For certain states, sales tax is due in full when the car is sold. However, for other states, (i.e. Texas), the sales tax is due as the payments are collected. The sales tax report works in conjunction with the A/R and cash flow report to make sure the dealer is paying sales tax only as the monthly payments are received.

In states where the law requires sales tax payments as money is collected, this approach improves the dealer’s monthly cash flow.

While all of these reports are very helpful in running a buy here pay here dealership, it is also important to maintain the company’s Balance Sheet, Income Statement, and Statement of Cash Flows as part of financial statement audits and potential IRS examinations.

Software investment and tracking can pay dividends. One dealer we know is one of the most profitable in the region with several locations and many loyal customers. He credits it to the customer-centric approach of keeping the customers he has, getting referrals and reducing his inventory costs, major repair costs and sales quotas. And who doesn’t like profits?

If you think this approach could work better for your dealership in the long run, talk to the auto dealership team at Cornwell Jackson. You can also Download the Article here: Customer Service: A Better Approach to BHPH Cash Flow

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.

Posted on Apr 22, 2016

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.

Customers at buy here pay here lots may be down on their luck or simply looking for a short-term solution to their transportation needs. Regardless, the industry norm of high default rates has inspired some dealers to manage cash flow through repossession. They sell cars quickly and repossess them just as quickly — only to resell them again. A customer who fails to pay is an opportunity rather than a liability.

And yet, dealers interested in stronger financial management are choosing an alternative. It’s called customer service. Before we go down the road of discussing transient, hard-to-reach clientele, abandoned cars and months of missed payments, let me say that customer service in the buy here pay here world means something different than your average retail scenario. The ultimate goal is to secure a longer stream of monthly payments per customer — knowing that very few loans will get paid in full.

Change Your Service Mindset for Buy Here Pay Here Dealerships Customer Service

WP Download - BHPH Customer ServiceIf a dealership is operating on the repossession model, it will take time to develop a focus on customer service. First of all, the sales process must shift from a focus on getting the car sold to a focus on learning about the customer. Each customer will have unique expectations, needs and approaches to problem solving and communication. This information will be important if the dealer’s mindset is now to keep the customer in a car and to collect payments.

For example, a dealer may explain up front that the customer has a full or limited warranty on any mechanical repairs for a set period of time. This option is designed to keep in contact with the customer and make small repairs to avoid bigger ones. Frequently, a broken down car equals stopped payments. Instead, the dealer offers to make repairs, eliminate this common excuse for non-payment and stay in contact with more customers.

Other examples of establishing regular communication and service include offering regular spot checks on the vehicle, letting customers upgrade to a nicer model and keep payments the same. Dealers may also offer to pick up a vehicle free of charge if it breaks down. While it seems that all the work and expense is on the dealer’s side, the benefit of extra service is to sustain thousands in payments each month while reducing the need to sell as many cars per month.

At the same time, the customer may feel more loyal for the help provided…and refer friends and family.

Get Your Team on Board for Customer Service Changes

For this customer-centric approach to work, the dealer must get buy-in from the entire team. This includes reception and collections staff and service teams. If, for example, the collections staff is now focused on keeping a customer in a vehicle rather than repossessing it, their communications style has to change. They also must communicate with customers as soon as a payment is missed rather than waiting 60 to 90 days to meet legal requirements for repossession.

Collections staff must be trained to ask more questions when calling about missed payments and to show sympathy by offering some solutions. They can ask the customer to come in and make a payment. They can offer a discount if the payment is made within the week. If the car is broken down, they can discuss repair options. Sometimes it is helpful to review the payment history and the customer’s income arrangements to discuss paying ahead when cash flow is healthy and then having a couple weeks or months of no payments when cash flow is thin.

Service technicians must provide a cordial environment to support the customer relationship. Their goal has changed from getting a job done to keeping a customer happy.

Follow a Consistent Strategy

A dealership cannot focus on repossession and also provide good customer service. A consistent, customer-centric approach looks more like this:

  • Review all existing customers on a weekly basis and identify which customers are currently behind on payments.
  • Contact customers and invite them to the dealership to talk about getting current on payments.
  • Offer a list of options that can support up-to-date payments.
  • Once customers visit the dealership, provide a welcoming experience that demonstrates your interest in keeping the relationship.
  • Outline a plan to continue the payment stream:
    • Get the vehicle in and inspect it or make repairs
    • Provide a discount
    • Add missed payments or big repairs on the end of the existing loan
    • Get customers into another vehicle through refinancing
    • Adjust the payment schedule to support changes in circumstances
  • Follow up and stay in contact through in-person visits as much as possible.
  • Monitor payment habits and communicate as soon as there is a change.

Once the customer-centric approach is in place and working consistently, dealers can start to calculate how many customers making regular monthly payments are needed to support a consistent budget and profit margin. This can help dealers plan ahead by creating a fund to cover customer vehicle repairs, upgrade the service area or advertise. This consistent approach can also reduce the required quota on new sales per month, and therefore investment in new inventory.

If you think this approach could work better for your dealership in the long run, talk to the auto dealership team at Cornwell Jackson. To learn more, download the full article here.

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.