Operating a dealership is fraught with challenges and obstacles that are completely out of your control. Because of that, it’s important to control those areas that we can control – like how we create and use financial data within the dealership. Make no mistake, the financial reports tell you everything you need to know about the performance of your business. This is where the deeper questions begin. So, here’s three things to make sure you’re getting right about your accounting and financial reporting.
Method and Accuracy
There are two types of accounting methods: cash and accrual. As you might guess, the cash method accounts for things as cash comes in and cash goes out. If you’re currently using the cash method, you’re probably not getting an accurate picture of your dealership’s performance. This makes the income statement very “lumpy” because you might buy inventory in one month and sell in another, which makes the profit small in the month you buy and big in the month you sell. This is not an effective way to measure your financial performance.
This is where the accrual method comes in. The accrual method matches expenses with revenues and the periods they’re incurred. For example, if you purchase car X in January but don’t sell it until February, the car will sit in an inventory account until February when it sells so that the cost of the car offsets the revenues from selling it. This gives an accurate gross profit (revenues minus cost of goods sold) so you can analyze how much gross profit is leftover from selling cars to cover other expenses like salaries and wages, advertising, etc. This might be an obvious thing to do with inventory, but if you look deeper at issues like accruing the commissions related to those car sales, it gets more complicated. In order to look at the full cost of selling vehicles, it’s important to accrue the costs associated with selling so that the revenues and expenses directly offset each other.
Reporting Competency & Transparency
Having a proper accounting method in place is one thing, having a management team that can interpret that information is an entirely different matter. I’ve been in countless meetings with owners and management teams that will look at the profit and if it went up, good, if it went down, bad. The deeper question is, why? Why did it go up or why did it go down? Understanding the answers to those questions requires a deeper look into the financials and being able to understand what you’re looking at. What is gross profit? What is net income? What is gross profit percentage? The answers to those questions are not difficult and doesn’t require a master’s degree in accounting, but it will require some training. With the plethora of online resources available today, training the management team on how to read and interpret financial statements is a worthy investment.
Once they have that knowledge, it’s important they’re given that information on a timely basis. Financial statements are time sensitive, they need regular review to figure out what’s going on. If the statements are just being analyzed once a year for tax purposes, that’s too late. If wages are creeping up and gross profit is staying flat, your net income is shrinking – you need to know that answer today. Don’t be stingy with who you share financial performance numbers with and make it a habit to review them on a regular basis, monthly at most. This will keep everybody in tune with how the business is performing, not how people think it’s going.
Part of interpreting what the financials are telling you is doing the financial analysis. What is gross profit percentage doing over time? What did it look like last year, and the year before that, and what is that trend? What percentage is your total commissions to sales? Is that increasing or decreasing over time? What’s your percentage of advertising expenses to sales? The answers to those questions are answers about how effective and efficient the dealership is in operations. If advertising expenses as a percentage of sales is decreasing over time, then your marketing is being more effective (more sales are happening per-dollar-spent on advertising). If it’s growing over time, then it’s being less effective. Just knowing that information enables you to know where the fixes need to take place. If your commissions as a percentage of sales is growing over time, then you may need to restructure your commission package to incentive better profits per-car-sold. The financial statements are rich with information about performance, but it takes a little extra effort to pull that information out and analyze it.
There you have it. Three small investments that you can begin working on today that will make a huge impact on the visibility into your operations and drive better performance.