|With the economy coming to a screeching halt, it is time to take a hard look at where you can not only conserve cash but also generate it.|
If you are a typical dealer, you probably check your cash balance daily. Some dealers run their business by their checkbook balance, while others use the actual bank account balance and release checks accordingly. Which is better?
The biggest difference between the two methods is the dealers who watch the actual bank balance don’t seem to have as much cash to operate. They seem to struggle more and can only release checks to pay bills and other items if they happen to get a deposit that day. Most of the time, the checks have already been printed or written and are being held by the accounting department until the funds are there to cover them.
Running your business this way means you are spending an awful lot of time trying to manage your cash instead of actually running your business and selling cars. Your office manager is also going to spend considerable time assisting you by constantly checking the online balance of your cash account to see if any electronic deposits hit the account that day. If a deposit did make it into your account, then you get to pay some bills! If not, the bills will have to wait until another day.
A way to increase your cash flow is to review your receivables. Review your outstanding balances in your contracts in transit, vehicle receivables, accounts receivable, incentives, pre-delivery, finance and insurance reserves, factory receivables such as warranty claims, and other receivables. If you have an outstanding balance in any of these accounts, review the aging of the balances. Each receivable has an average number of days in which it should be collected. This doesn’t mean they can’t be collected in a shorter time period. You can increase your cash flow just by concentrating on the collection of your receivables and trying to speed up the entire collection process.
Speeding up the process starts when the receivable is generated. Make sure the documentation you have for the receivable is adequate to ensure collection in a timely manner, maybe even before the average days it normally takes to collect it. When aged receivable balances are on the books, they are almost always accompanied by a story. Sometimes these stories are interesting, and sometimes they are not. Either way, it means they are not being collected because something was not completed correctly or there were problems with the way it was generated.
These types of receivables seem to come in groups and don’t tend to be collected as they are not a priority anymore. It is going to take more than normal work and effort by someone to correct the problem. The person responsible for correcting the problem is now too busy to spend the time on it and is more concerned with the current day’s business. This means the balances will become older and older until it may become impossible to collect them.
Normally, the accounting office is trying to collect these old balances. They are often hampered in these efforts because they were not involved in the original transaction. As a result, they are not very successful. Accountants end up writing these off to bad debts at year end. So, they do eventually go away, but not the way it was intended. It doesn’t put money in your bank account.
Other accounts that tie up cash are prepaid expenses. Try to minimize the amounts you invest in prepaid assets. Make sure it makes economic sense to invest in the prepaid expense if you have the choice. If a discount is offered, make sure you can afford to take advantage of it. Without adequate cash flow, you may have to pass it up.
The biggest offender of cash flow is lack of inventory management. Inventories have ballooned up due to lack of sales. It is not that you were overstocked when sales were good. It may be you were not really paying attention to maintaining the proper mix of costs and models. Now what do you do? You may owe more on them than they will wholesale for. That means you are as upside down as some of your customers are when they come to you and want to trade—not a good position to be in. You can’t afford to take all these overage vehicles to the auction and dump them. The losses would be horrific. Most dealers are going to have to work their way out of this inventory.
I don’t have the magical wand to wave over your inventory to cure these problems. There will be a time when the prices will stabilize on these vehicles and maybe increase somewhat once consumers get used to higher gas prices and adjust their overall mileage. Right now they can’t afford to keep driving them and you can’t afford to trade for them.
If the economy doesn’t stabilize soon, dealers may be forced to liquidate some of their overpriced inventory to strengthen their cash flow. If this happens, wholesale losses will increase and/or retail gross profits will decrease dramatically at the same time dealers are experiencing low volume sales and increased competition from each other.
Only time will give us the answers. Take a look at your cash position and see how much ready cash you actually have. Do you have some cash reserves in a cash management account? If so, hang on to them. Try not to manage your business by watching your actual bank balance.
Review your cash situation now, and determine how to manage it from your cash not your checkbook balance. Run your business instead of reacting to it.
Chinese carmaker Zotye Automobile has formed a U.S. sales and distribution company and has begun a search for dealers of a yet-to-be-named SUV.