In recent years we have seen several instances of poor accounting and lack of controls with our clients’ account receivables. A significant component of converting profits to cash is the collection of your various receivables. Although most of our clients have controls in place, it is worth a review of your particular situation to ensure proper compliance.
Receivable schedules should be monitored weekly or bi-weekly. The office manager should distribute and review the schedules with the department manager. The office manager will then report the results to the general manager or dealer. The key here is communication and consistent monitoring. Any receivables that are written off must be approved by the dealer/general manager.
The following summarizes some suggested guidelines for keeping receivables “under control.”
We have seen many collection issues with rebate receivables. Incentive programs are complicated and some dealers are recording incentives that are ultimately rejected. If an incentive is over thirty days it is an indicator of a problem. Chasing down aged incentives requires an inordinate amount of time and effort by the accounting office. As this issue is typically a sales department issue, sales staff must be held accountable for understanding the programs, submitting the appropriate paperwork, and collecting their rebates. Many manufacturers refuse to research any unpaid incentive once the rebate reaches sixty days. Sales staff and sales manager’s compensation must be adjusted promptly when an incentive is deemed uncollectible. Obviously in the current environment of low new vehicle grosses, collecting the incentive is critical.
We have seen significant problems with co-op advertising receivables. For example, sales managers post advertising expenses to the receivable that do not qualify for reimbursement, paperwork is not proper, or the program has expired. The dealer or general manager needs to review this account monthly making sure that any balance is in fact reimbursable.
Parts and service receivables should be minimal in a dealership. Retail customers should not be granted credit. Many dealers explain that their receivables are high as they have wholesale customers. Credit checks must be performed before any wholesale customer is allowed to charge. In addition, payment terms must be clearly stated to ensure payment within thirty days. Since wholesale parts sales generate a low gross profit, typically twenty percent, dealers cannot afford to be extending credit beyond thirty days. If you are having a problem with older parts and service receivables, you need to re-evaluate your credit policy.
You should not carry any balances in vehicle receivables, customers should not be granted credit on vehicle sales. Review this schedule periodically to ensure that all deals are paid in full at time of delivery. You may want to reclassify credit balances for customer deposits to a separate account so that it does not distort the balance.
Contracts in transit should never be over ten days old. Rarely should they be over five days old. Older contracts in transit are usually the result of careless paperwork. I asked a multi franchise dealer recently why his store never had any aged contracts. He said “the answer is simple; if a contract is unpaid after five days the F&I manager’s compensation is reduced by $10 for each subsequent day.”
Warranty receivables should also be minimal. Claims are submitted online and approval is almost instantaneous. Claims that are not paid should be charged back against the service manager’s commission.
Finance reserves are not as simple as you would think. Problems occur when the reserves are not reconciled monthly, or the reconciliations are not prepared properly. The differences between the anticipated commission and the paid commission must be investigated and charged off monthly. If an F&I manager experiences significant adjustments in any month the office must alert the dealer. The reconciliation should be prepared similarly to cash in bank reconciliations. The balance per the finance company should be reconciled to the general ledger balance.
Each dealership must establish policies for monitoring their receivables. If you have ageing issues, weekly manager meetings should be conducted. Once the situation improves, you can move to every two weeks. The key here is policies must be in place and enforced and the office manager must be communicating and addressing aged accounts with department managers. Dealers and general managers should be spot checking these schedules and asking questions. Also, the “DOC” should include information on aged receivables.
If you have any questions regarding this article, please contact Paul McGovern at PMcGovern@DowneyCoCPA.com or at 800-849-6022.
