From October 24 to 26, Paul McGovern attended the 2008 American Institute of Certified Public Accountants’ National Auto Dealers Conference. The conference was attended by six hundred CPAs and automotive financial professionals. The following are highlights from the conference:
1. There were several presentations on the current capital and credit markets’ impact on the industry. Most dealers will be able to survive the downturn in sales. However, the current credit and banking situation will be more difficult to endure. Bankers concurred that there is very little liquidity in the market and they are expanding their exposure to dealerships. Bankers will work to maintain existing relationships, but have little capital to take on new business. It is extremely difficult for a manufacturer to terminate a dealership that is perceived to be underperforming, but it is easy for a manufacturer to terminate a store that does not have a floor plan line of credit. Therefore, it is critical that all dealerships maintain their existing floor planning relationships. Banks will no longer look the other way when a dealership is out of trust by a few units or does not pass its financial covenants. They will pounce on this situation to increase your interest rates and curtailments or more dramatically, “shut you off.” Lack of liquidity in the financial markets has made it almost impossible to refinance your floor plan. This situation can only improve, but it may take several months.
2. Another presentation discussed inefficiency in the sales department of dealerships. The top third sales consultants do well; the middle third are comfortable and are mediocre performers; and the bottom third churns every sixty to ninety days. The bottom third sees over half of a dealership’s new prospects, as the top and middle performers sell mainly to their existing customers and referrals. Poor performers cost the dealership six sales per month on average. This costs the dealership an estimated $28,000 per month between lost gross on the sale, the trade in profit, and lost service business.
The main reason a sales consultant fails is that they are improperly trained and supervised. The training process should extend up to six months and the trainee should be paid a higher salary during this time period. Dealers should hire younger sales consultants, as opposed to experienced individuals who have been unsuccessful at other stores. Sales people in general do a poor job of negotiating with the customer and this aggravates the consumer. A dealer should consider using fixed pricing to control this activity. The customer will be happier as the sales process will be much shorter and he or she will not have to interact with the sales manager. The sales process should be completed in two hours. In addition, it was suggested that sales people work only forty hours a week. This can be done as 70% of the vehicles are sold during 30% of the time that the dealership is open. Dealers tend to have too many salespeople working in off peak hours. Finally, successful dealers have younger sales consultants and many women sales consultants.
3. Successful dealers are building significant wealth via their reinsurance programs. The IRS is comfortable with the structure of these programs and is not focusing on ones that are organized properly.
4. Smaller software DMS providers are gaining significant market share with monthly maintenance and support for $500 to $1,200 per month. The large providers are lowering their costs but are still several thousand dollars per month. The large providers have more sophisticated applications, however most dealers do not utilize the additional functionality.
Additionally, dealers should be cautious about signing long term support and maintenance contracts. Dealers that cease operation are still liable for the remaining term of the contract. The smaller providers generally require very short-term contracts (one year or less).
5. The IRS is conducting more examinations nationwide of auto dealers. However, they are not focusing on any specific automobile dealership issue at this time. One thing to be aware of, during the past year, the IRS has assessed large deficiencies to a handful of dealers related to capitalization of inventory costs.
We are committed to assisting dealers through these difficult times with education, periodic updates, and open lines of communication. If you have questions, call anytime, but especially between 8:30 a.m. and 10:00 a.m. on Wednesdays, when Paul is in the office and ready to take your calls. The calls are free and Paul is happy to discuss anything related to dealership tax, accounting or management issues. Alternatively, you can email him at pmgovern@downeycocpa.com.
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