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October 2017
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Dealer finances – always a balancing act
Garry Bartecki
Garry Bartecki

 

This month we will discuss Dealer Finances. A topic not nearly discussed enough among C-level dealer personnel.

But before we move on to the topic of the month, I need to relate a couple of my personal experiences related to technology and artificial intelligence.

While looking for a new computer for the granddaughter I took a dive into a virtual reality demo and after that demo plus some discussion about both augmented and virtual reality came to the conclusion that both will play a part in your business with a win-win-win result in terms of the dealership, your customers and your customer’s customers. My goodness, what opportunities lay ahead for those that take advantage of this technology to better their service offerings as well as operator and safety training.

Add in the digital IoT aspect as well and I see lower personnel costs and higher margins with short-term payback on almost any investment made in these technologies.

Well, we can dive more into the technology topic another day. Let’s get back to dealer finances.

When this topic was first suggested for this month’s cover story I immediately thought “balance sheet” and not “financing’ in terms of bank loans, floor planning and other typical forms of financing a dealership. Because when you get down to it how your balance sheet reflects your liquidity and investment status is a result of properly managing all the line items that make up the balance sheet.

Let’s face it….if you properly manage your balance sheet you will provide a cushion to weather slow times, have adequate cash on hand, not be overleveraged and be able to meet all bank covenants without even doing the calculations. And you will accomplish these results knowing the systems and policies you have in place automatically cause these results to happen. A nice place to be as opposed to wondering every day if you make the next payroll.

Sure the income statement is part of the equation. And every dealer wants to grow their business. But every dealer out there has to understand that every dollar of sales requires some level of additional capital to support it, because, in most cases, invoices become due before revenues are collected, and since banks normally fail to cover 100% of such a situation additional capital is required to cover the shortfall. Additional collected revenues can help, stretching out payables will provide some cash flow, using bank lines properly can help and, last but not least, you can provide additional capital for the company. I am sure you understand that two of the four solutions noted decrease your liquidity position and add more risk.

When was the last time you sat down and studied your balance sheet? When was the last time you compared your balance sheet to MHEDA’s DiSC report and compared your results against those of the High Profit Dealers?  I am confident a lot of you look over the income statement side of the MHEDA report but spend little or no time on the balance sheet found on page 11 of this year’s report.

What do the high profit balance sheets reveal?

A higher cash balance …..which is the #1 requirement on my list

Less debt

Less AP and accrued expenses

More equity in the business.

On the income statement side of the equation high profit firms put more on the bottom line because they spend less in almost all categories and have less interest to pay. In the 2017 report high profit profits before tax are approximately 85% higher than a typical dealer. A nice spread, don’t you agree?

One of the reasons for this spread is related to asset turnover and especially inventory (all forms) turnover along with proper time and dollar utilization of rental units. And where do we find these inventories and rental assets ….on the balance sheet.

So do yourself a favor and spend some time on your balance sheet. Pay special attention to your real cash balances and debt service requirements because debt service requirements will eat you up when things slow down or when your expand the business beyond what your current working capital levels can handle.

First of all plan to prepare a monthly cash flow projection for the next 12 months and then get more specific for the next quarter. As each quarter ends add another quarter to the schedule and so on. You should also have a daily cash statement reflecting the book cash balance with side lists of what needs to be paid in the month….debt service…..payroll dates….and other material cash payments required. This should be a daily report as well as a cumulative report for the month to show you how cash moves for the entire month and for what purposes it was spent. Do this for a few months and you will get a feel how cash moves, which will make it easier to plan and prepare the cash flow report.

Next, move on to the inventory accounts and ask for a detailed report for what you have and how fast is it turning. A big part of this part of the program is how fast work orders are being completed, processed and billed. The faster you turn assets the faster the cash hits your bank account. The service department should provide a status report on all open work orders daily to the COO. The same goes for the parts department…..what are they ordering ….why….and are the parts being provided to the tech waiting on the parts the day they arrive and does the service time cycle meet company or industry turnover requirements.

The same review applies to both used equipment and rental fleet assets. Turn them or sell them and convert to cash. There is no excuse that I can think of that justifies holding assets that are not adding to your ROA calculation.

On the debt side it is always a good exercise to explore the financial markets to see what is happening out there in terms of operating line advances, term loan interest rates, repayment terms and required covenants. Obviously, lower asset investments lessen debt service burdens because more cash flow will be generated from the revenues being generated.

I myself work with a company that has an operating line with advance rates against both AR and parts inventories, cap-x lines that pay for rental assets purchased that only convert to a term loan once a year. Term loans are either 60 or 72 months. Terms loans use Swap rates which are currently quite a bit lower than the standard term loan rate. The bottom line here is I have loans that do not require the first term loan payment for up to a 12-16 months after I purchase and receive the asset.

And what about your vendor payment terms. Any way you can extend payment terms? Are they doing it for any other dealer? You don’t ask….you don’t get.

All said and done, it pays to prepare that cash flow statement as noted above and if cash it tight to take steps to turn assets faster (turn them or sell them), try to extend fixed debt payment terms, get all work orders completed and billed to strict industry standards and as a result convert inventory or rental assets faster into cash.

There is little doubt there is room for improvement if you are not in the high profit category. And this improvement is more or less mandatory to remain in a competitive position in the future, because investment in IoT and other digital advancements will demand some of that additional cash you generate from getting your balance sheet under control.

I have a daily/monthly cash flow worksheet I can share with you. I will send it to MHW and they can put it on their website.

One last suggestion….when you prepare that cash flow projection ….do some sensitivity analysis and prepare a second one assuming a 20% reduction in sales. And maybe, this is the version you should be planning with if you need to increase cash flow dramatically. Adjust expenses assuming the more conservative revenue numbers, which puts you in a position to become a cash machine over the next 12 months, with the ability to fine tune operating expenses if customer expectations cannot be met as opposed to just riding the current expense structure and eating up cash you could be putting in the bank.

Dealer finances start with the balance sheet. Spend some time on your balance sheet and adjust as necessary. Stop wondering if you will make the next payroll….know that you will.

Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail editorial@mhwmag.com to contact Garry.

 
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