As dealers continue to ride out these difficult economic times, they will need to make crucial decisions to ensure that their business remains viable. Proper decisions can only be made if the dealer has timely and accurate information at his/her disposal. One of the most important sources that a dealer should be able to rely on is accurate and timely prepared monthly internal financial statements. When analyzed properly, they can assist a dealer in identifying departmental deficiencies, discovering areas to institute cost cutting measures and evaluating overall dealership performance. It is important to make sure that the statement is as accurate as possible. The following are examples of specific areas where improper reporting often occurs:
- Sales cutoff – Many dealers leave the sales journal open for a few days after the close of the month, often times to make it appear to the factory or management that sales were better than they actually were. This distorts actual activity for the month and can cause additional bonuses and commissions to be paid that are unwarranted.
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Timely recording of expenses – Vendor invoices are not entered in the proper month. By not properly recording, expenses are not accurately matched to the period they are related to. This can cause swings in expenses that do not allow the dealer to adequately anticipate future expenses. It can also create cash flow issues. An expense that is frequently overlooked is advertising expenses.
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Payroll – Often times payroll is only recorded when paid and not when earned. As part of the monthly closing process, the amount earned yet unpaid should be accrued.
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Used vehicle writedowns – Dealers should review their used vehicle inventory and realistically value them more often than the year end writedown. By doing so, used vehicles will be recorded at a cost that reflects its true value. This will allow the sales staff more of an incentive to sell a vehicle. Sales will generally shy away from a vehicle they feel is overvalued and cannot be sold at a price that generates any profit.
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Receivables – Dealers need to ensure that all receivables outstanding, be they vehicle, parts and service or factory receivables, are collectible and any that are uncollectible are written off on a monthly basis.
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Accruals – Significant expenses that the dealer traditionally records at the year end (bonuses, professional fees, parts inventory costs, etc.) should be expensed proportionately on a monthly basis.
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Prepaid expenses – Expenditures for items paid in advance (real estate taxes, service contracts, etc.) need to be expensed over the period the item covers. These are sometimes created and then are never addressed until year end. They should be reviewed and adjusted each month.
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Standard journal entries – Most common are the standard entries for depreciation expense. Depreciation on any significant acquisitions made during the year needs to be reflected. It is common for the expense not to be properly recorded and result in a material adjustment at year end.
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Reconciliation of accounts – These typically include factory receivables, finance reserves, and parts accounts. Without reconciling on a monthly basis, issues related to these accounts cannot be addressed in a timely manner. In most cases, if the issue is not resolved within 30 days the dealer will not be paid on them, resulting in unnecessary chargebacks. These accounts should be reconciled on a monthly basis to prevent this from occurring.
Without accurate reporting, a dealer’s ability to make decisions is compromised. The dealer must be able to rely on the information presented on the monthly financial statements and not have to worry about unanticipated adjustments. We suggest that you review the monthly closing procedures with your office manager to ensure that results are reported as accurately as possible on a monthly basis using Downey & Company’s monthly checklist for dealers and office managers.
