This year take a different and fresh look at your dealership’s balance sheet and income statement.  Does it look similar to some of your Special Finance customers’ net worth and earnings?  Do you have enough cash to pay your bills and payroll when they are due?  Are you paying higher than normal interest rates on your line(s) of credit and other business and personal loans? Your bank, auction and vendors consider you a finance customer every day. So, how is your credit rating with them?  If you take a look at the financial status of your dealership, you may find you are as “credit challenged” as your SF customers. 

Banks and other financial institutions aren’t normally very comfortable with a business that doesn’t generate enough cash flow to pay their bills and bank payments in a timely fashion and meet their other financial loan covenants. If you find yourself in this position, there are steps you can take to help you get back on track. 

First, ask yourself how you have arrived at the current financial position you are in.  Did you start your business with enough cash to adequately capitalize your average monthly expenses, inventory, receivables and equipment purchases?  Did you start out with enough money, but have had some bad periods you have not been able to recover from?  Did you invest enough money in the beginning but draw out more than the profits to spend or invest elsewhere?  All of these are very common problems.  You should always remember the car business is a “greedy cash hog” that will take as much cash as you can normally invest and then some. Before you know it, the money has been spent.

Next you need to uncover where your cash has gone.  The best way is to complete a simple cash flow statement (some accounting software packages will generate this report for you).  A cash flow statement is a comparison of your balance sheet for two different periods to find out what the sources and uses of cash are.   The definition of an asset is, “total resources of a person or business, as cash, notes and accounts receivable, securities, goodwill or real estate.” If your assets, besides cash, have increased from one period to another, then this is considered a use of cash because you had to use cash to gain more assets.  Conversely, if your assets have decreased, then this is a source of cash, because you had to sell or otherwise reduce assets to gain cash flow.  A general definition of liabilities is debts or money owed.  If your liabilities have increased, this is normally a source of cash. If your liabilities have decreased, then you have used cash to pay your bills or loans.  Net income normally increases cash (source), and a loss decreases cash (use).  Distributions are a use of cash.  The table below summarizes the above:

There are several accounts that do not affect cash at all.  They are usually accounts where accounting entries are made for tax purposes or to accrue items for internal use only.  Some of these non-cash type accounts are depreciation and amortization expense, changes in allowance for doubtful accounts and certain reserve liability accounts such as deferred revenue. 

Once you have completed the analysis you should have three amount columns on your paper or spreadsheet.  These would be the two different accounting periods and the change in balance column.  You may want to add a fourth column to your analysis for your goal balance for each account and a fifth column for the difference between your current balance sheet and your goal. The last two columns will indicate where you have excess cash invested in assets that should be liquidated back to cash.  They will also indicate where you may be over extended.

For your dealership you will want to include each active general ledger balance sheet accounts, non-cash income or expense accounts and net income or loss so you can see each specific account change. A simple summarized example is as follows:

The above net change in cash is $25,000, which should equal the difference in the cash account balance of the two periods. If these two do not balance, you have an error in your cash flow statement.

By completing the above analysis on a monthly basis, you will see how your cash position is changing along with how close you are to achieving your goals.  This will help you manage your company’s finances.  If you have (used) cash, you need to evaluate where it went.  You can sustain losses as long as you have the same amount of excess cash invested in your business.  If not, you will soon feel the cash flow restrictions.  You will need to secure additional capital with financing or by liquating non-performing assets. 

Complete this analysis now, then continue by comparing each month in 2007 to the Dec. 31, 2006, amounts to reveal where your cash is.  You can also compare the current month to the prior month.  This exercise, although sometimes confusing and complex, will allow you to take corrective actions quickly so you and your dealership can become a “credit worthy” customer instead of a Special Finance customer.

If you have questions about this example or how to prepare a cash flow statement for your dealership, e-mail me.

Vol 4, Issue 2

Source

Use

Assets increased 

X

Assets decreased 

X

Liabilities increased 

X

Liabilities decreased

X

Net income

X

Net loss                     

X

Distributions

X