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Getting Cash to Flow

October 14, 2010

With sales still lackluster at many stores, having enough cash on hand to meet obligations remains a management challenge.  The first step in strong cash-flow management is maintaining an organized system for cash accounts.  It's also important to maintain a tight collection policy and to properly account for inventory.

Getting cash to flow
Although the U.S. economy shows signs of healing, many dealerships continue to bite the bullet as they look for ways to meet payroll demands, finance floor plans and make a profit.  With sales still lackluster at many stores, having enough cash on hand to meet obligations remains a management challenge.

Banking on management
The first step in strong cash-flow management is maintaining an organized system for cash accounts.  Keep at least two bank accounts - one for general funds and one for payroll - and have your accounting department reconcile them monthly when bank statements are received.

Small daily overages and shortages aren't uncommon.  To maintain an organized system for managing cash, set aside any discovered variances in cash deposits each day in a separate general ledger account.  Also, review and reconcile this account monthly.

Depending on your dealership, a large percentage of cash can come in through contracts-in-transit. You should maintain only one general ledger account for these transactions.  Any division of this account allows for additional, unnecessary entries and greater room for error.

Claiming cash promptly
To free up cash, process a sale as soon as possible after it's completed.  Collect all contract balances within five days and investigate all credit balances.  Time lags can tie up a large amount of cash.  You can determine the average time it takes for funds to be received and when floor plan payments are due.  To convert paper to cash sooner, submit paper to financing companies several times daily.

Maintaining a tight collection policy can help free up cash and save you money in the long run.  Your computer system probably lets you print summary receivable reports so you can thoroughly review accounts aging.

Keep in mind that the "true worth" of accounts receivable worsens as time passes.  According to a study by the U.S. Department of Commerce, receivables legitimately considered current are worth 100 cents per dollar.  But those same receivables are worth only 67 cents per dollar when more than 90 days old and only 43 cents per dollar after one year.

You can keep an eye on receivables through a few simple activities.  Exception reports can print out all receivables more than 30 or 60 days old.  Generate these reports weekly for department managers to review and clear.  Each dealership should maintain an updated list of the 20 oldest receivable balances, indicating the customers' names, amounts owed and current collection status.

Additionally, institute a credit policy that authorizes a maximum of two or three people to approve credit limits for commercial accounts, establishes clear credit restrictions and sets up an aggressive collection program.

Lastly, hire a top-notch warranty administrator.  Aim for a three- to five-day time span between submitting a claim and getting paid.

Accounting for the goods
A dealership's inventory of excess new and used vehicles can slow cash flow to a trickle.  Assign someone to reconcile and verify your monthly floor-plan statement for new vehicle inventory.  Pay attention to discrepancies between the date that vehicles are delivered and the date interest starts to accrue.

Also verify that payoff dates are accurate, and limit the number of managers who order inventory. Target vehicles more than 90 days old for speedy sales.

For used vehicles, determine if your inventory is too large based on current demand.  Then take action to convert the excess to cash.  Reduce the selling price, provide extra incentives to salespeople to sell used vehicles and offer promotional items to potential buyers.  Send your no-sellers to the auction house for rapid disposal.

For parts inventory, dispose of items older than three years. Computer software programs can highlight excess parts inventory over current needs and help reduce obsolescence through automatic tracking.

Managing with a purpose
Through strong management, you can improve your dealership's flow of cash.  If you start with the basics, such as separating general funds from payroll, processing sales quickly and tightening your collection policy, you'll be on the road to improved cash flow.


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