Financial Tools: Plunge Into Your Balance Sheet for Revealing Information
Many dealerships generate detailed financial information and send it to their banks and manufacturers each month. This typically includes an income statement and a balance sheet.
The balance sheet can be a useful tool for dealerships that know how to uncover the nuggets of data that lie within these reports. Savvy dealerships use the information to improve their financial performance.
Think of it this way: The balance sheet gives you a snapshot of your dealership’s financial position at a given point in time. You can see at a glance your assets, liabilities and owner’s equity (or capital) using the formula: Assets = Liabilities + Owner’s Equity.
One of the balance sheet’s best uses is to help gauge how well your dealership is collecting accounts receivable (AR). When used together with AR aging reports, which list the specific invoices that are overdue, the balance sheet can help you monitor the overall status of your AR. For example, if your monthly sales are considerably higher than your monthly collections, you’re likely not collecting your AR promptly.
Dealerships typically have several different types of AR on their books, such as service repairs, warranty work, contracts in transit, finance, manufacturing incentives and rebates. Consider this timetable for receiving balance sheet reports on your AR status and aging from your controller:
• Service repairs: Every 30 days
• Warranty work: Every seven days
• Contracts in transit: Every seven days
• Finance and manufacturing incentives: Every 30 days
Reporting for rebate receivables, meanwhile, should be structured based on your manufacturer’s payment terms. For example, if these terms are net-30 days, request balance sheet reports once a month.
Along with inventory aging reports, the balance sheet also can serve as a valuable inventory management tool. Vehicle inventory is usually the largest asset on a dealership’s balance sheet, so it’s clearly an area that requires extra care. By reviewing your inventory aging reports and balance sheet, you can calculate any impairment losses due to declines in the value of your new and used vehicles. Then you can make decisions about what to do with vehicles that have been on your lot for a long period of time, such as 150 days for new vehicles and 60 days for used vehicles.
For example, since the market for used vehicles can sometimes fluctuate drastically, you might consider reducing the price on the used cars you’ve had for more than 60 days or wholesaling them. Using the balance sheet to age new vehicles, meanwhile, will help you see if you’re carrying too much new inventory and thus paying more in financing costs than you should be.
Other areas to monitor
Prepaid expenses are another balance sheet item to watch closely. Dealerships sometimes pay for a year’s worth of radio or TV spots in advance, but is this a good use of cash? You may be better off using the money to boost cash flow.
Also keep an eye on “we-owe” items. These are things you’ve been paid for but that haven’t yet been delivered to customers — for instance, new tires, down payment deposits or prepaid service owed to the customer. Do you still have the inventory or cash on hand to deliver these items?
Boost financial performance
Don’t just look at financial statement preparation as a monthly chore required by your manufacturer. Instead, dig deep into your balance sheet for information that can help you better manage your dealership.