|It is almost year end again. Wow! You have almost made it through another year. It probably is a year you would like to put behind you and not endure again in this lifetime. Well, I think most of us feel that way about 2008.|
BHPH dealers sometimes face customers to whom they can’t or don’t want to sell cars. There may be multiple reasons. One may be that the dealership and related finance company don’t have adequate capital and borrowing power to extend credit to all the potential customers. Another reason may be the customers are in such bad financial shape and the dealer has already taken such huge write-offs on his portfolio he can’t afford to take on the risk. Either reason means the dealer can’t grow his portfolio, future cash flow and profitability.
|Let’s take an annual review of your business.
Start with your note portfolio. Have you reviewed delinquency and recency reports and made the decision to clear off all the non-performing loans before year end, so the principal balance at year end is realistic? If not, consider doing this to “get clean” before year end. Why carry these bad loans to another year and delay the inevitable? Make the adjustments before year end.
Review your capital needs. Banks and other financial institutions are not in the lending mode right now. Most have tightened up their own portfolios and set up reserves for their potential losses. They have raised interest rates to help cover the increased risk they think they have with their outstanding loans. Well, their portfolios are the loans they have made to dealers like you and other businesses. They are also under duress from the bank regulators to clean up their loan portfolios. If you plan any major changes to your expected capital needs, get ready to make your pitch to the lender by preparing accurate financial statements and cleaning up any problems before year end.
Take a look at your expenses. Compare your expenses against other 20 group members. Compare them to industry averages. If some are high compared to the industry guides, review the detail of the expense accounts to see if you can reduce, eliminate and/or defer some of the expenses. Some you may not be able to do anything about, such as fixed expenses. Others, such as variable expenses, are a good place to reduce the cash outlay and improve profitability.
Prepare a simple cash projection. I know these are a pain to do. Where and how do you start? The best thing to do is to use your current month-end balance sheet and year-to-date income statement. Review your portfolio and print cash projections for the next 12 months.
1. Start with the total cash you expect to collect in payments (principal and interest).
2. Then, decrease this by the percentage of repossession losses incurred over the past year. Using the 2007 average will hopefully be conservative as these losses have been higher for most dealers in 2007 than in prior years.
3. Decrease it by expected reconditioning costs, which can be determined by multiplying the number of cars you expect to sell and the average reconditioning cost.
4. Decrease the total cash by annual total expenses.
5. Next, decrease it by any principal payments required on your outstanding loan balances in the next year.
6. Reduce the cash total by any collected sales tax and license and title fees payable.
7. Decrease cash by the total projected payable amount for extended service contracts for the year.
8. Subtract the amount of projected fixed asset purchases that will not be financed from total cash.
9. If you don’t have a separate finance company, you will also want to add the expected down payments to the total cash expected.
10. Then, subtract any increase or add any decrease expected in inventory.
11. Finally, add your current year-end cash balance to the total cash expected.
This is a very simplified cash projection. I have not covered every account that may need to be considered, but it will be a good start. Once you have it completed, review it with your accountant for reasonableness, and make changes as necessary. This will give you some idea if you will have enough cash to sell the number of vehicles you expect to sell in the next 12 months.
Get ready for year end. Review your balance sheet to make sure you have support for all the balances. Prepare the supporting detail for all the accounts and put them in a folder or binder in order by general ledger account. Examples of supporting detail are bank statements and the associated bank reconciliation, portfolio loan balance reports, inventory reports, copies of any fixed asset purchases made in the current year, accounts payable open invoice report, accrued expenses (copies of bills paid in the next month that were incurred by year end), detail of any dividends and/or distributions paid to owners, etc.
Review your income statement. Print reports of the year-to-date total repossession expense, interest expense and earned discount income (if applicable), and compare these amounts to the balances on your income statement. Hopefully they are close. If not, you may want to review why they don’t match up. Compare your expenses against the prior year for reasonableness. If any are out of line, review the account detail for both years to ensure they are correct and make sense based upon your sales volume. Separate your travel and entertainment expenses based upon what is zero percent, 50 percent and 100 percent deductible. If you paid any life insurance or penalties, set up separate expense accounts for both. Check your rent expense and make sure you have a detail and total of all payments made to different parties. Ask your accountant what other accounts they may need to have support for and have them ready.
Now, take another deep breath. Hopefully 2009 will be a much better year for the auto industry.
Let’s all hope so. Oh, don’t forget to exhale! And, good luck in 2009!
Vol 5, Issue 12
Auto retail veteran and F&I products expert Paul McCarthy has joined AUL Corp. as vice president of national sales.