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Cash is King: How to Improve Your Cash Flow Stream

June 23, 2017

Increasing sales and revenue is a top priority at most dealerships, as it should be. But in their drive to boost sales volume, some dealerships lose sight of another aspect of their financial management that’s just as important: cash flow.

Even the best run dealerships can experience cash flow peaks and valleys. So it’s important to plan ahead and take actions to strengthen the flow during the valleys that will inevitably occur.

Is your capital on ice?

One of the main causes of cash flow problems for dealerships is what’s sometimes called “frozen capital.” This happens when dealership resources aren’t used for maximum efficiency. Frozen capital most commonly takes place when excess cash is invested in assets that aren’t producing income in the course of a regular business cycle.

For example, assume that you sell $100,000 worth of parts each month and your goal is to keep a 45-day supply of parts in stock, or $150,000 of inventory ($100,000 × 1.5 months). If your inventory creeps up to $200,000, or your supply stretches to 60 days, $50,000 of cash will be tied up in excess inventory. The extra 15 days of supply is considered frozen capital that’s not being used effectively — and could be crimping your cash flow.

Scour your balance sheet

The best way to thaw frozen capital is to scrutinize your balance sheet in search of wasted resources. A few common sources of frozen capital for dealerships are:

Vehicle receivables. Just because cars and trucks aren’t sold on 30- or 60-day payment terms doesn’t mean dealerships are immune to the challenge of collecting vehicle receivables. For example, frozen capital in vehicle receivables can happen due to:

• Incomplete financing application paperwork being sent to lenders,

• Slow movement of the deal through the dealership, from the close of the sale through F&I to accounting, and

• Ineffective customer collection procedures.

One way to improve collection of vehicle receivables is to speed up funding of contracts in transit. Also make sure that it’s easy to trace the deal folder throughout the deal flow process and that there’s no deficient paperwork slowing down vehicle payments.

Vehicle inventory. Excess used vehicle inventory is one of the most typical causes of frozen capital for most dealerships. Effective vehicle inventory management is a true balancing act: Stock too much inventory and the excess carrying costs will eat into your profits. But stock too little, and you might not have the vehicles your customers want when they want them, thus jeopardizing sales.

Improving management of your vehicle inventory starts with setting goals for inventory turnover and then tracking them. For example, many dealerships aim to maintain a 60-day supply of used vehicles. If vehicles remain on your lot longer than this, you need to decide whether to keep marking them down until they sell, or wholesale them.

Manufacturers’ rebates and incentives and warranty receivable.s Your employees should submit paperwork for manufacturers’ rebates and incentives as soon as vehicle sales are recorded. When things get busy, employees sometimes put off this task — but every day of delay results in more frozen capital and stymied cash flow.

Warranty receivables also can lag if you aren’t diligent in following manufacturers’ instructions when completing and submitting reimbursement paperwork. Regularly review the warranty receivable schedule with your managers and identify the status of every warranty claim. If there are any aged warranty receivable balances, they should immediately be appealed to the manufacturer.

Parts and service receivables. This is the area of a dealership that operates most like other businesses that generate accounts receivable. The bulk of parts and service receivables typically come from wholesale accounts with independent repair and body shops and parts wholesalers.

The volume of parts and service receivables can quickly get out of hand if you aren’t careful. Best practices for effective parts and service receivables management include timely issuance of invoices, regular production of accounts receivable aging schedules, strict enforcement of credit policies, and aggressive collection of past-due receivables.

Defrost frozen capital

Most dealerships can usually withstand short-term dips in sales or profits. But cash flow shortages can prove fatal — even for dealerships that are profitable on paper.

So take steps now to identify and thaw out frozen capital, and thus boost your cash flow. Doing so will significantly strengthen your dealership’s financial position.

Should you prepay for assets?

Dealerships sometimes opt to prepay in full for expenses like insurance premiums, advertising and capital equipment to receive a lower price. But you must also consider the impact that prepays can have on your cash flow.

From a cash flow standpoint, it’s often preferable to pay for such assets in installments instead of prepaying. With capital investments in particular, you should investigate whether or not equipment financing or an equipment lease would provide cash flow benefits as opposed to buying the capital outright with all other things considered.

© 2017