Posted on Jul 28, 2016

Your dealership likely prepares and sends operating reports to your manufacturer every month. How you use the reports beyond sending them to the factory can have a big impact on your dealership’s profitability.

Here are three ideas for using your monthly operating report as a tool to stay on track as the year progresses.

1. Keep an Eye on Revenue.

Every manufacturer’s report is different, but yours likely contains, in some format, a summary of that month’s operating revenue. These figures can quickly tell you which departments are the moneymakers and which lag behind expectations.

Let’s say that the current month’s operating report for a dealership shows that it brought in the following in gross revenues: $2 million in new car sales, $750,000 in used car sales, $140,000 in parts sales, $61,000 in service income and $56,000 in body shop income.

You also can see how income from your store’s various departments compare with the prior month, as well as a year ago, the dealership’s projected budget, benchmarks and so on. Let’s assume that you projected $2.25 million in new car sales for the current month. With sales coming in at only $2 million, you are concerned that first quarter sales are off to a slow start and, thus, choose to move up by several weeks a new car sales promotion you had planned to run in two months.

Another example involves gross revenue versus turnover. Take Dealer A, who buys a vehicle for $20,000, holds it for 90 days and finally sells it making a $3,000 gross profit. Many dealers would be pleased with this outcome. But let’s also consider Dealer B, who spends the same $20,000, sells the vehicle in 30 days but only achieves a 10 percent profit margin or $2,000 gross profit. The difference is that Dealer B does three times the sales in the same 90 days, doubling his total gross income compared to Dealer A.

There are many other ways to use your operating report to analyze front-end operations.

2. Figure Out the Reasons Behind the Numbers.

When you analyze the back end of your operations, for example, you’ll look at income and expenses in the service, parts and body shop departments.

Let’s say that you have a gross profit of $33,000 in the service department. This alarms your manufacturer, because it’s less than 55 percent of your monthly service sales and shows that your gross profit percentage has slipped from the target of 65 percent. But it shouldn’t be a major concern if the reason for the shortfall is that the department was busier than usual refurbishing used cars for sale next month — and profits for that venture won’t start showing up until the following month.

3. Consider other Benchmarks.

Monthly operating reports are also a way for you to measure your dealership’s performance against more complex benchmarks. Consider, for instance, the concept of “service absorption.” This is defined as the sum of total parts, service and body shop gross profits divided by the sum of total fixed expenses plus dealer salary plus parts, service and body shop sales expense. (If your report doesn’t have this category, you could calculate it from the other data provided.)

Let’s say that your store’s benchmark range for service absorption is 85 to 100 percent, but your current operating report shows your store coming in at 83.8 percent for the month. This figure is only slightly below the bottom of your benchmark range. Nonetheless, you might want to take steps to lower expenses or bump up revenue for the next month to be sure your store is in the benchmark range.

Achieving a service absorption of 85 percent or higher will give you a competitive advantage over your competition, because the new and used departments only need to cover 15 percent or less of your dealership’s total fixed expenses. Thus, you can afford to take less gross profit on an individual sale.

Knowledge Can Be Golden

By studying your manufacturer’s operating reports, you can arrive at countless insights, from your day supply of vehicles to the gross profit per technician to determine an adequate employee count in the back end. All of this knowledge can be golden, because it helps you recognize strengths, pinpoint weaknesses and set goals for the rest of the year. Don’t let it go unnoticed.

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 19, 2016

The Federal Trade Commission is making full use of its bolstered regulation and enforcement power over auto sales advertising.

How One Ad Misled Consumers

The FTC is paying particular attention to ads that are posted online or on social media.

The agency reportedly has said that dealerships boost their chances of problems with the FTC by taking ads that might have been fine for print or on television and cutting and pasting them online. The reason: Fine print can become unreadable when reproduced in smaller print online or a video.

In one case against an auto dealer, the FTC complaint says the website ad included a photo of the car and a video. Near the end of the video ad, a block of text appears stating:

“. . . . Priced with all applicable manufacturer rebates and incentives. Does not include tax, title, acquisition, registration or doc fees. Not all model trim levels will be applicable. Kelley Blue Book: Minus the mileage, wear and tear up to $10,000 fair. Not to be combined with any other offer. See dealer for complete details.”

Combined with other examples of the dealers’ website ads, the FTC concluded that “the company does not disclose important additional terms of the prominently advertised lease, including but not limited to whether consumers must pay tax, tags, registration or doc fees, the number of lease payments, and whether an extra charge may be imposed at the end of the lease.”

When the Dodd-Frank Wall Street Reform and Consumer Protection Act became law in 2010, the FTC’s power over the ads increased. The agency now looks at television, print and online ads to see if they clearly spell out all the costs and other important terms of a sale needed by consumers. Dealers publishing misleading ads risk censure and potentially severe financial penalties.

The FTC has charged several auto dealers with false or deceptive advertising about the cost of buying or leasing cars. Most dealers settle the charges by agreeing to take a series of administrative steps to ensure that future ads comply with relevant laws and regulations.

The agreements warn that further violations may result in civil penalties. Those penalties could amount to as much as $16,000 per day. The agreements remain in effect for 20 years.

One enforcement action charged a Massachusetts auto dealer with running advertisements saying consumers could lease vehicles with no money down and specified monthly payments. The FTC said the advertised amounts did not mention substantial fees.

In a consent order, the dealership agreed to follow the rules applying to such ads, which requires clearly and conspicuously disclosing, for instance, whether the price in the ads are for loans or leases and how much money must be paid up front.

Among other dealerships charged were:

    • A Maryland dealer that allegedly advertised “Internet prices” and “dealer discounts” not available to a typical consumer.
    • An Ohio dealer who allegedly ran a bait and switch operation in which discounts applied only to more expensive models of the advertised vehicles.
    • Two dealerships in California charged with advertising vehicles for sale for $5,000 less than their actual prices. Both used ads that included a mix of English and Spanish.
    • A dealer in Georgia allegedly advertising auto financing with low monthly payments, when the payments advertised were temporary “teasers.” After making a few payments at the teaser rate, the monthly payment would go up.
  • A Michigan dealership that allegedly sent out mailers falsely claiming that the recipients had won sweepstakes prizes.

The dealerships are charged under a variety of laws and regulations, including the FTC Act, the Consumer Leasing Act and the Truth in Lending Act. All the dealers said the violations were not deliberate.

Closely review your dealership’s ads to ensure you don’t inadvertently run any ads that could be construed as misleading.

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.