Auto Dealerships - Page 2 of 4 - The CJ Group

Posted on Sep 12, 2017

BHPH dealers may need to consider data collection in ways they haven’t before, or ways of collecting data that weren’t required before, to develop forward-thinking estimates of credit loss.

For example, our clients will often review data on all the loans issued in a given month, and then analyze how those loans are performing as a gauge of how all loans are performing for the year (static pool analysis). They might see that 10 percent of loans defaulted in the first six months and another 10 percent defaulted in the next six months. Using that static pool of loans, the dealers will then calculate a discount rate before selling the portfolio to the RFC.

With the new standard, tracking average default rates for a short time period is not enough. Analysis will have to go deeper to determine “potential loss” over the life of loans. The final risk-based calculation will be reported in the dealer’s current earnings as an “Allowance for Loan and Lease Losses (ALLL)” on financial statements.

If the ALLL increases — as many think it will under this new standard — it will impact the net worth of a financial institution on its financial statements. That’s why it’s so important to collect the right data and make sure it is accurate. Incomplete or inaccurate historic data — such as data that has not historically been audited — will affect the accuracy of the final calculation

Operators may need to track data such as expected timing and extent of projected cash collections of the loan portfolio as well as projected losses and an estimate of future principal losses. In order to estimate future losses, it may also be helpful to track:

Actual cash value and type of vehicle sold
Customer risk assessments, including credit scores
Underwriters approving each contract
Collectors assigned to which loans
Loan performance data

The level of risk estimated also correlates to the amount of cash reserves an entity may be required to hold to support these expected losses over the life of the loan portfolio. Known as your entity’s “reserves for credit losses,” this amount may need to increase under the new accounting standard if you find that “expected credit losses” over the life of the loan portfolio are higher than the real incurred losses that previously guided reserves.

Continue Reading: CECL and Loan Portfolio Analysis

In light of this new federal accounting standard for monitoring and calculating expected credit losses, BHPH operators of all sizes will likely require additional professional support. A CPA knowledgeable in BHPH operations can help you determine the standard’s impact on your current accounting methods, monitoring and reporting. Talk to the audit group at Cornwell Jackson to start planning for internal and external finance changes in the next few years.

Mike Rizkal, CPA is the lead partner in Cornwell Jackson’s Audit and Attest Service Group. He provides advisory services, including financial audit and attest services, to privately held, middle-market businesses. Contact him at mike.rizkal@cornwelljackson.com

Posted on Sep 5, 2017

Following the global financial crisis of 2007 and 2008, the Federal Accounting Standards Board (FASB) has taken steps to mitigate risk among financial institutions. One of the newest standards is a change from the “incurred loss” accounting model used to evaluate financial portfolios to an “expected loss” model known as the Current Expected Credit Loss model (CECL). For BHPH dealers, CECL will require changes in loan and lease loss recording, which in turn requires changes in the type of loan data collected and how it’s analyzed. This article outlines what BHPH dealers can do to prepare for this sweeping change and why it’s important to start planning now.

At a recent TIADA conference, BHPH dealers and related experts were discussing the impact of the Current Expected Credit Loss (CECL) model on their industry.

New Credit Loss Standards

CECL was announced in 2016 as part of a new Federal Accounting Standards Board (FASB) update, and it “represents the biggest change to bank accounting ever,” according to Mike Gullette, vice president, Accounting and Financial Management, for the American Bankers Association. The implementation deadline is by 2021 for all financial institutions. The deadline for SEC filers is 2020, and these entities will likely set a course that non-SEC filers will use to develop their own standards methodology.

This new standard impacts any financial entity with the following assets, including Related Finance Companies (RFCs):

assets subject to credit losses and measured at amortized cost;
certain off-balance sheet credit exposures, including
- loans
- held-to-maturity debt securities
- loan commitments
- financial guarantees
- net investments in leases
- reinsurance and trade receivables.

In essence, CECL is designed to make financial institutions examine the future risk to their portfolios, not based on actual incurred losses in the portfolio but on expected loss. This expected loss isn’t reliant on annual loss rates, but on expected “life of loan” data or life of portfolio loss rates.

In future blog posts we will drill down on some immediate impacts to the BHPH industry — specifically on loan portfolio data collection, analysis and loan covenant considerations.

Continue Reading: Current Expected Credit Loss Model and Data Collection

Posted on Aug 24, 2017

If you’re thinking that social media is just for teenagers, think again. More than half of those logging on to social media sites are in their mid-thirties or older.

Traditional media outlets such as newspapers, radio, and television have long served the purpose of delivering one-way messages, like your dealership’s advertising.

Social media, by contrast, uses Web-based platforms to not only deliver your message, but to allow the recipient to participate.

You’ll find a number of technologies under the umbrella of social media, including e-mail, instant messaging, blogs and social networking websites.

In fact, sites like Facebook and Twitter have now surpassed traditional search engines when it comes to reaching new car prospects, according to J.D. Power and Associates.

The end result? Social media is not only changing the way your customers access news and information, but how they do business. If your dealership has not yet embraced the power of social media, it might be time to take another look.

What Radio Station Do You Drive?

Brandcasting is what manufacturers, including some auto dealers, are doing to promote their products in a way that is less intrusive and more inviting. Rather than employing the traditional media to do “push” marketing, they are using social media to “pull” the audience in. How? By cleverly linking the public’s passion for cars with their passion for music through a dealership-provided “radio station.”

The radio station is brand-specific and is linked from the dealer’s website. The public can access the station 24/7 on their computers or smart phones, and play the music in the background while they migrate to other sites or answer e-mail. If a listener should happen to visit the actual brick-and-mortar dealership, he or she would likely hear the same station playing in the showroom or as the “on hold” music during a phone call.

The idea, of course, is to marry the listener’s love for cars to the dealer’s brand. Towards that goal, the music is embedded with subtle messages that promote the dealership’s new and used cars as well as its service specials. Think of it this way: the music is the precious cargo, and the marketing messages are the Styrofoam packing peanuts that fill in the empty spaces along the journey.

It’s a clever idea that goes straight to the heart of selling… using shared interest to turn a prospect into a friend.

Two Success Stories

If branding, communication and targeted marketing efforts are not compelling enough, consider the following social networking success stories:

Texas Dealer, Domestic Automobiles. A dealership in Texas recently launched into the realm of social networking. To get the ball rolling, the dealer decided to tie its social networking initiative into a fundraiser for Haiti relief. For every fan added during a specified time frame, a dollar was donated to the Haiti relief effort. To further sweeten the transaction, the dealership’s corporate offices jumped on board and matched the dealership’s pledge.

Employees spread the word about this fundraiser through posts on their own social networking sites. And, in just over a week, the dealership added several hundred fans. These additions not only translated into several thousands of dollars donated to Haiti relief, but, the fundraising and fan-raising effort garnered a significant amount of publicity for the dealership as well as an online following.

Minnesota Dealer, Foreign Automobiles.Interested in entering the social networking realm, but concerned about the time commitment, one Minnesota dealer adopted software made expressly for dealers interested in expanding their social networking ventures. Within days, the dealership boasted a number of accounts, including one on Facebook. In addition to establishing a presence, the software integrated with the dealership’s dealer management system, which allowed for their inventory to be displayed directly on their Facebook page.

The dealer added more than 150 fans during the first week and received recognition from a number of traditional media sources. The dealer now averages 35 client and prospect interactions per week as a result of this social networking initiative.

Social Networking Websites

Separate from our professional lives, many of us have a profile on at least one social networking website. That’s why many businesses, large and small, are employing this innovative new marketing tool. Automobile dealerships are no exception.

Adopting these technologies, however, involves more than creating a profile or fan page for your dealership. To really be effective, it requires a shift to a culture of transparency. And, it is this window into your dealership that makes it more important than ever for your message to be consistent at every point of contact with current and prospective customers.

How Social Media Puts You Out Front

Establishing a presence on social networking sites can give your dealership a competitive edge in several ways, including:

1. Brand Enhancement.

Profiles, fan pages and participation in groups all serve to build awareness about your dealership’s brand. They also provide an opportunity to interact with current customers as well as begin the relationship-building process with prospective ones.

2. Open Communication.

Social media, including social networking, is based on the principle of two-way communication.

Your dealership can benefit from both the positive experiences and negative feedback that customers voluntarily share. Not only can you address these customer concerns publicly, but you then have the chance to make any necessary improvements. You have the unique opportunity to make lemonade out of lemons.

3. Target Marketing.

Establishing a presence on social networking sites can help you identify, and subsequently target, potential customers. While the need for advertising through traditional media outlets may not be eliminated, the ability to target marketing communications reduces overall costs and provides a greater return on your marketing investment.

Tapping into social networking analysis tools may also assist with targeted marketing efforts. What if, for example, you knew that online discussions about trucks and SUVs waned during the prior 12-month period, while conversations about fuel efficiency, including hybrids, increased significantly?

Now there is some market intelligence to take under advisement when developing your marketing message. It is important, however, to keep in mind that overt advertising on social networking sites can be received negatively, so your message should be developed with that caution.

Social Networking Best Practices

Whether you are new to social networking, or a seasoned veteran, it’s important to:

Make a Commitment.

Social networking, like most marketing tools, requires a commitment to time and possibly finances — perhaps even cultural change within your dealership — in exchange for successful results.

Be Visible.

Make sure that your brand remains consistent between the various social networking sites. Develop a communications plan that keeps your dealership visible, but that does not overwhelm your online following.

Listen First, Respond Second.

Once your program is established, monitor the social buzz daily to keep a pulse on both current and potential customers. Much like a dinner party, you must listen before you respond. Then, once you have a clear picture of what is being said online, you can determine a course of action.

Keep it Local.

Customers and prospective customers alike want to do business with dealerships that are within driving distance. Keep this in mind as you develop and refine your social networking plan.

Make it Easy.

Remember to make it simple for people to find you. Add social networking information to business cards as well as your dealership’s Web site.

If your dealership hasn’t yet gotten its feet wet in the world of social networking, it may be time to rethink your marketing strategy. Establishing a presence on social networking sites can be particularly effective when it comes to heightened brand awareness for your dealership and for identification and targeting of potential customers. In addition, finding ways to tie social networking initiatives into community efforts can create a win-win situation for everyone involved.

Posted on Mar 16, 2017

If you’re like many dealers, your vehicle inventory may have yo-yoed over the last few years. You likely experienced a glut of new cars during the recession, while used cars generally continued to move — sometimes with not enough supply to meet the demand. Then, typically, your manufacturer adjusted production, sending fewer cars — and far fewer trucks and SUVs — your way.

Perhaps more than ever, you must stay focused on your inventory. Here are five tips to help your dealership keep its supply at a realistic level.

1. Avoid overstocks in the first place.

One way is to regularly evaluate your inventory control tools and establish some best practices for sustaining a feasible volume. Consult with your technology adviser, for example, to see what new vehicle-tracking hardware and software have hit the market.

Also reassess any inventory rules of thumb you may follow. One line of thinking holds that an inventory-to-sales ratio should be about 2-to-1. If you plan to sell 50 units, you should keep at least 100 vehicles on your grounds. But which formula works best for you in today’s market?

2. Share your stock.

Consider teaming up with other dealers selling the same brand to reduce your new-car stock. Just be sure these “pooling partners” are close enough geographically to make sharing practical, but far enough away to avoid direct competition.

3. Order only what you know will move quickly.

Closely track pattern failures in any or all of the vehicles you stock. Meet with your CPA regularly to discuss whether you’re getting the inventory data you need and assessing it properly. And do what you can to make your inventory turn.

If a used car customer is interested in a particular vehicle that’s out of stock, for example, keep a record of the request in case the vehicle comes into inventory later. Put this document in a shared (electronic) place that all salespeople — including your auction buyers — can reference.

4. Evaluate your website and online practices.

If business at your dealership is still slow, use the extra time to assess your website and overall Internet presence with the simple goal of moving more stock. Remember, most buyers do homework on the Internet first, and you want potential customers to linger on your site — not skip off to your competition’s website. Consider using video, which can be effective in getting potential customers to act. Web research firm eMarketer estimates that currently, 88 percent of all Internet users are video viewers.

Some dealerships feature sports stars or other celebrities in their videos to attract viewers. And video customer testimonials can be a powerful tool. Also be sure to evaluate your e-mail responses.

5. Do your homework.

Always do your homework to make sure your prices are competitive, and that these are the prices you’re advertising. One strategy holds that you should price vehicles for subprime (and other) buyers. Some dealers, for example, look for vehicles they can buy $1,000 to $1,500 under wholesale book, believing that allows them to cover their lenders’ fee structure and still make a good gross profit.

Posted on Feb 15, 2017

No one likes to be audited by the IRS. It costs time and, thus, money — even if no additional tax, interest or penalties are assessed — and it’s stressful. So, what can your dealership do to avoid an IRS audit in the first place? It’s simple: Don’t attract unfavorable IRS attention. Reviewers can’t audit every return, so they rely on key indicators to narrow the scope.

Plan “A” — Careful Preparation

To reduce your chances of being audited, you need to examine your business practices and your dealership’s return while thinking like an IRS agent. Be accurate and consistent with the information you provide, and pay special attention to:

Compensation.

Because most dealerships are family-run businesses, the IRS keeps an eye out for unreasonable compensation. Align your salaries with industry benchmarks. Accurately record hours worked, unique contributions from high-salaried employees, and any other factors that influence pay spikes to executives or officers.

Cash transactions.

The IRS is much more likely to audit businesses with frequent cash transactions. Most of these occur in your parts department. Report these transactions properly by making sure the transaction is recorded in your accounting records with a proper paper or electronic trail.

The size of business loss deductions.

Large business loss deductions are red flags to an IRS reviewer. Document each loss and keep receipts. Be able to prove your intent to make a profit, even if you’re temporarily losing money.

Travel deductions.

Keep detailed auto expense logs and be able to justify the business-use percentage. Alternatively, you can employ the standard deduction rate of 54 cents per mile driven in 2016.

Nondeductible contributions.

Contributions to political action funds aren’t deductible for income tax purposes, including the portion of your NADA and state auto dealer association dues that fund political action committees (PACs). Give your CPA the annual statements provided by your associations indicating the portion of dues that fund PACs so that the matter can be handled properly on your tax return.

Business credits.

If you think one of your dealership’s credits might come into question, attach an explanation to the documentation. Show the IRS reviewer that you understand the rules.

Meals and entertainment.

Keep receipts for any expense totaling $75 or more. Include the name and location of the meeting facility. To avoid penalties if you are audited, keep detailed descriptions of events, who attended, business relationships and business discussed.

LIFO.

Keep accurate records of your previous years’ LIFO invoices. Despite the three-year statute of limitations for auditing tax returns, your current year’s LIFO reserve can be affected by several years of built-in layers. Thus, LIFO workpapers and calculations should be kept permanently.

Related-party receivables.

Keep documentation of related-party loans. There should be a signed loan agreement between the parties with a stated interest rate. Typically loans greater than $10,000 need to have interest paid between the parties. The minimum interest rate should be the applicable federal rate in effect at the time the loan is made.

Variances.

Do a high-level review of your tax return. If items are grouped differently from the previous year, it could draw IRS attention. An example: You classified your rental vehicles as part of your property and equipment in Year 1. Now, in Year 2, you classify them as “other assets.”

Plan “B” — Professional Assistance

No one wants an IRS audit. If you are conscientious about the records you keep and wise about the tax decisions you make, you can avoid waving the red flags that might trigger one.

But if, despite your best efforts, the IRS requests an audit, enlist the help of your CPA promptly and cooperate with the agency fully. Your CPA can perform a pre-audit, which includes reviewing the more complex areas of your tax return as well as any areas singled out by the IRS.

Posted on Jan 23, 2017

Are You Savvy About F&I Employee Fraud?

A few years ago, several employees from the same dealership were convicted of defrauding their customers, lending institutions and warranty companies, and some received stiff prison sentences. Their crimes — many originating in the finance and insurance (F&I) department — could repeat themselves in your dealership if you aren’t aware of the possible F&I schemes.

Prevention, Prevention, Prevention

Training is essential to guard against fraud in any department at your dealership. Train all employees as to what is considered a fraudulent, unethical or unacceptable practice. Make sure that they know you have a no-tolerance policy toward wrongdoing, and make them aware of the consequences of fraudulent behavior.

Are Employees Padding Costs?

In this fraud, an F&I department employee includes items in the vehicle price that the customer didn’t agree to, such as destination fees and, most frequently, warranty costs. The salesperson quotes a price that doesn’t include the warranty fee, and then gives the customer the monthly payment amount that does include it — without getting the customer’s consent.

If the customer questions the warranty, the salesperson may say it’s required in order to lock in a certain interest rate. This is false: The interest rate depends on only the customer’s credit history.

To help prevent schemes such as this one, have customers fill out and sign a checklist acknowledging that they’ve approved or rejected your dealership’s various products (gap insurance, extended service contracts, rustproofing and so on). Then have accounting personnel compare the checklist against individual sales and finance contracts to verify that the information is accurate.

Is Financing Approval Legitimate?

This scheme involves telling the customer that he or she has been approved for financing, delivering the vehicle and letting the customer drive it for a few weeks. But then the other shoe drops: A financing department employee calls back to say that the loan fell through and, to keep the vehicle, the customer must pay a premium and a higher monthly payment.

Crooked employees usually practice this rip-off on customers with poor credit, who they assume feel shaky about their creditworthiness. The employee knows the real payment amount and the interest rate offered by the financing institution before delivering the car. But he or she assumes that, after driving the vehicle for a time, the customer will develop a certain comfort level and agree to pay more to keep it.

To catch employees doing this, watch your contract-in-transit schedule to see if any deals are taking too long to be funded. You also can send out customer satisfaction surveys and read any responses received carefully. If you notice several buyers — or even one — complaining that monthly payments went up unexpectedly, investigate further.

Another internal control: Almost all lenders provide some type of approval process for customer loans. Create a document for customers that acknowledges they’re aware of the lender’s financing terms. Make sure that the document contains the bank’s approval code for the loan.

Then have your accounting department compare the customer’s acknowledgment of the loan terms with the bank’s approval. Accounting also should compare the acknowledgment document with other documents in the deal — sales contract, financing agreement, bank approval of loan and so on — to ensure that everything is spot-on.

Are Credit Scores Accurate?

In this fraud, a financing department employee lies to the customer about his or her credit score, saying it’s lower than it really is. The employee then charges the customer a higher interest rate, increasing the dealership’s income from the sale.

Crooked employees try this on customers who won’t be too surprised to hear they’re having financing problems. Most consumers with strong credit ratings would know they were being duped.

One way to prevent this scheme — and, indeed, most financing-related schemes — is for an F&I manager to review all customer agreements. If a customer’s credit score doesn’t mesh with the interest rate being charged, foul play could be to blame. Just be sure to rotate reviewing duties among several F&I managers. If you don’t have more than one, randomly review customer agreements yourself on occasion.

The After Effects

If you detect F&I fraud in action, the end result might be a conviction of your crooked employee. But think of the inestimable damage to your business’s reputation as word is passed from the unhappy customers around your community. The best defense is a strong offense, they say, so safeguard against F&I fraud in all feasible ways. As a dealership owner, your customers’ loyalty is the trump in your hand of cards.

Posted on Dec 20, 2016

If you’re looking for a way to lower your tax bill and your dealership owns real estate, a cost segregation study may be the answer. Read on to see if you qualify.

What Is a Cost Segregation Study?

You may be eligible to retroactively save taxes through accelerated depreciation if you purchased real estate, built a new showroom, renovated your facilities or expanded your property anytime since 1987.

Traditionally, dealers depreciate nonresidential buildings and improvements over 39 years using the straight-line depreciation method. A cost segregation study, however, works differently. It identifies, segregates and reclassifies qualifying property into asset groups with shorter depreciable lives of five, seven or 15 years. These shorter lived personal assets are eligible for MACRS accelerated depreciation schedules, rather than straight-line depreciation.

Cost segregation studies are used for tax purposes only. Your GAAP financial statements won’t be affected by the study, unless your dealership uses tax depreciation methods for book purpose, too.

Which Assets Qualify?Take a look at what’s included in the value of your real estate. Chances are the gross amount will include such things as carpeting, window treatments, wiring, cabinetry, lighting, driveways, wall coverings and cubicles, landscaping and drainage. Soft costs such as architectural and engineering fees might also be lumped into the total. All of these items potentially can be carved out as personal property and depreciated more quickly than standard real estate.

For example, suppose a dealership purchased a new showroom for $5 million in 2003. In 2013, the dealership’s CPA conducts a cost segregation study and determines that the following assets can be reclassified:

Parking lot ($500,000);
Carpeting, blinds and wallpaper ($20,000);
Cabinetry ($25,000);
Lighting ($5,000);
Service equipment ($200,000); and
Landscaping and drainage ($50,000).

This study enables the dealer to reclassify and accelerate depreciation on $800,000 of its fixed assets. In 2013, the dealership can deduct all the depreciation it could have taken since the building was acquired 10 years before.

Auto retailers tend to achieve some of the highest savings from cost segregation studies compared to other businesses. That’s because dealerships own significant fixed assets — including display areas, lift and repair equipment, showrooms, and other specialized mechanical systems — that can be mistakenly classified as real property.

When Will Tax Savings Happen?By reclassifying assets, dealers can maximize their depreciation deductions in the early years, improving cash flow sooner rather than later. Cost segregation studies adjust the timing of deductions, not the total deductions taken over an asset’s life.

Since 1996, dealers have been able to capture immediate retroactive savings from cost segregation studies. Before then, taxpayers had to spread depreciation savings over four years. Today, you can deduct the full amount as soon as your study is complete, thereby dramatically lowering your current tax bill. Of course, if you’re buying, building or renovating a dealership currently, this also is an ideal time to perform a study.

By lowering the value assigned to real property, a cost segregation study also can help you save on real estate, sales and use taxes.

Why Do I Need a Formal Study?

Formal cost segregation studies are required to support the deductions on your tax return in accordance with IRS guidelines. An experienced professional can analyze a dealership’s blueprints, engineering drawings and electrical plans to determine exactly which assets qualify as personal property. Bottom line: A formal cost segregation study will prove its worth if IRS auditors come knocking.

Savings Varies

Tax savings will vary depending on the value of your property, its age and your effective tax rates. But, it’s not uncommon to convert 20 to 40 percent of total building costs from real to personal property. Contact your Cornwell Jackson CPA to discuss how much you can expect to save from a cost segregation study.

Posted on Dec 12, 2016

For dealers who want to keep control of their portfolio but also increase profitability long term, they need to focus on customer longevity.

To keep their customers in a vehicle longer, more BHPH dealers are offering some kind of warranty. Many more have optional service contracts available. Offering mechanical protection up front with the car sale increases the chances that a customer will contact the dealer if the car breaks down. Some warranties include an option for free towing; this gets the car — and customer — back to the dealership to resolve any issues.

With warranties and service contracts, of course, you need a well-run service department. The service department staff needs to focus on a good customer experience, not just keeping a car running. Staff also should understand exactly what is covered under the warranty or service contract in order to communicate with the customer and handle proper repairs.

For example, a dealer may explain up front that the customer has a full or limited warranty on any mechanical repairs for a set period of time. This option is designed to keep in contact with the customer and make small repairs to avoid bigger ones. Frequently, a broken down car equals stopped payments. Instead, the dealer offers to make repairs, eliminates this common excuse for non-payment and stays in contact with more customers.

By staying in contact with customers, the dealer can offer more options to keep them happy and making payments:

Get the vehicle in and inspect it proactively/make repairs
Provide a discount
Add missed payments or big repairs on the end of the existing loan
Get customers into another vehicle through refinancing
Adjust the payment schedule to support changes in circumstances

Consider offering regular spot checks on the vehicle or letting customers upgrade to a nicer model while keeping payments the same. Extra service can sustain thousands in payments each month while reducing the need to sell as many cars per month.

One of our BHPH clients recently spoke to us about outsourced bookkeeping services to free up his time to spend on repairs. He calculated that time spent in service was more valuable than in the back office if it meant getting more cars back on the road and payments in the door. In this competitive environment, the industry is advocating decisions like this, focusing more on customer longevity and extra service options. Dealers who free up their time from the back office or sales can focus on service and collections practices, including:

Reviewing all existing customers weekly and identifying which customers are currently behind on payments.
Contacting customers and inviting them to the dealership to talk about getting current on payments.
Offering a list of options that can support up-to-date payments.
Training staff on a welcoming experience that demonstrates your interest in keeping the relationship.
Monitoring payment habits and communicating as soon as there is a change.

Ultimately, a customer-centric approach will help your dealership become self-sufficient — with enough cash flow to reinvest in the dealership operations and enough efficiency to focus on attracting new customers (possibly through referral) and new revenue streams. If your vision is also to provide a valuable service to the community for people who need a car and can’t get one any other way, then a customer-centric approach is certainly the right business model.

Cornwell Jackson works with BHPH dealers frequently to adopt new approaches to service, cash flow and profitability. Review our previous whitepapers for your industry or contact us for a consultation. We can even assist with audits, reviews and compilations specific to dealerships to help your dealership access traditional bank financing or working capital if needed. We can also consult on timing and requirements to establish a related finance company as part of BHPH auto financing and portfolio management.

Download the Whitepaper here: Finance Competitors BHPH Can’t Afford to Ignore

Scott Bates, CPA, is a partner in the audit practice and leads Cornwell Jackson’s Business Services Department, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in auto, healthcare, real estate, transportation, technology, service, retail and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Posted on Nov 28, 2016

At the 2016 NIADA Convention, discussion of deep subprime competition on Wall Street emphasized that the model is not sustainable. But the question is not “when will the competition go away?” The question is “how can BHPH dealers compete now?”

Studies of the auto industry have shown that the average used car loan term is upwards of 63 months (5.25 years) with average monthly payments of $359. In essence, the deep subprime industry is extending the term, accepting a lower down payment and a lower monthly payment on average to increase volume.

However, successful independent BHPH dealers are limiting terms to 15-42 months, asking for at least $1,000 down and $12 more a month on average (amazing, but true).

This business model is cash focused rather than loss focused. Successful dealers limit their cash outlay for vehicles and set up transactions to recover their cash as quickly as possible. This is done by limiting their ACV to $5,000 and not more than $7,000. Also, while industry averages for customer down payments have slipped below $800, successful dealers are maintaining average down payments around $1,000.

Remember that the competitive landscape is increasing your risk. Your customers accept the benefit of lower-priced cars by putting some skin in the game with a higher down payment and higher weekly or biweekly payments. The National Bureau of Economic Research estimates that – all things being equal — extending a given buyer an extra $1,000 in credit correlates to an increased risk of default rate by 15 percent. Consider a customer putting $1,000 down on a $5,000 vehicle. The customer already has 20 percent equity in the deal, which has been shown to motivate more customers to make payments and not lose their initial investment. In turn, the BHPH dealership is receiving more cash up front.

A study for DriveTime noted that charging 20 percent APR is a fair return for risk in the current deep subprime market. Depending on caps in your state, reasonable APR can be as high as 23 percent, which puts your monthly interest payments at just under 2 percent.

Be aware that simple interest is a better method of accounting for BHPH dealers than accrued interest. The customer’s next interest payment is based on the previous month’s balance and doesn’t matter whether the customer makes a payment on the first day or last day of the billing cycle. Simple interest is a fairer process for dealers, especially with the variety of payment options offered to customers.

Now, if your salespeople are focused more on commissions than on securing a high average down payment, you may not be achieving the highest possible down payment available. Calculate the average down payments in your portfolio. Are the down payments fairly similar from one transaction to another? If so, then you may have a sales process problem. You will need to observe how salespeople are handling deals to make sure they are asking for higher down payments relative to the total sale price.

Cash Flow is Still King

As we have written about before, a healthy BHPH dealership has financial flexibility. That occurs through careful management of cash flow. With financial flexibility, your dealership can seize on opportunities that range from inventory purchases to upgrades in the service department and more sales or office staffing.

Cash flow can be improved by restructuring your business model and ensuring that transactions in your portfolio are achieving higher down payments and healthy margins. Old contracts should be replaced at a healthy rate while keeping customers in their vehicles as long as possible.

We also observe that dealers who control warranties and flexible service contracts also have stronger ongoing cash flow. These income streams make BHPH dealers more competitive as they encounter more of the “least-able-to-pay” customers in the market.

Some BHPH dealers are also exploring Lease Here Pay Here programs. This is not for every dealer. First of all, because the car title remains in the dealership’s name under a lease agreement, the dealership could be held vicariously liable in some states if the customer has an accident. Dealers need to carry “contingent” or “excess” liability insurance to mitigate the additional risk.

Monthly payments are smaller compared to financing, however dealerships can defer taxes because they can depreciate their inventory. Sales tax expense is typically reduced because it is remitted gradually over the course of the lease with each lease payment.

The residual value of the car at the end of the lease can make it easier to sell the car because the customer gets more car for a lower monthly payment. Most of the time, the customer will opt to extend the lease on the same car or lease a different car. If the customer opts to return the car at the end of the lease, this supports inventory at a time when finding vehicles at lower price points is difficult.

Another alternative source of cash flow is to sell part of the dealership’s entire credit portfolio. Although the credit portfolio is a dealer’s best asset, not every dealer has the skills or interest to manage it well. Certain financial services companies are offering programs to purchase all or part of the portfolio in exchange for up front cash — lowering long-term risk and eliminating any service or collections issues. The down side to this option is less control over the customer relationship and potentially less flexibility in deal structuring.

Continue Reading: Traditional BHPH Income Opportunities

Posted on Nov 11, 2016

Subprime lending is alive and well on Wall Street, and not just in real estate. Low interest rates and less consumer demand are prompting brick-and-mortar and online lenders to tap into subprime auto finance more than ever before. Rather than focus on this increased competition for indirect loans, auto industry experts recommend that BHPH dealers focus on operational efficiency and alternative sources of revenue. Dealers who improve cash flow through after-care products and customer retention can ride out the subprime boom. As a bonus, a more efficient dealership will be less reliant on working capital financing in the future.

In our last article about BHPH structuring and scalability, we wrote about ways to maintain compliance on bank financing, filing an accurate and clean tax return and operating at a profit. For start-ups and independent BHPH dealers, a clean structure will create more cash flow and level the field with subprime lenders at banks, credit unions and online. As we’ve said before, your best asset is not your inventory; it’s your credit portfolio. Let’s take a closer look at your competitors in auto financing. By learning about your dealership’s competitive advantages, you can add more streams of revenue, get more customers to finance on site and get more customer referrals.

Auto Financing Trends

According to a report by the Center for Responsible Lending, car pricing information available online helps consumers more effectively negotiate the sales price of a car. Because this has reduced the profit margin dealers receive on the sale of cars, all dealers are relying heavily on profits generated after the sale of the car — extended warranties, credit insurance, guaranteed asset protection (GAP) insurance, vehicle service contracts and so on.

In the case of auto financing, however, information is not readily available. Consumers can’t really shop around because financing is based on things like the type of car, the sales price and possible trade-in value as well as the consumer’s credit worthiness. An application for financing is submitted after most decisions are made — and that application could happen online or with the customer’s local bank or credit union.

Due to most consumers’ large appetite for used vehicles and lower tolerance for debt, BHPH dealers face increased competition from brick and mortar lenders and online deep subprime lenders. These lenders are accepting a larger share of consumers to finance for smaller loans than they would prior to the recession. BHPH dealers are a final destination for the least credit-worthy consumers who can’t get a loan anywhere else. This demographic is not easy to manage in collections anyway, which is typically why many BHPH dealers focus on repossession and resale more than on collections and service.

We get it. The competition to control financing is tough. Cash flow is tight. Inventory at auction isn’t what it used to be. You are competing for fewer cars with higher mileage and higher average cost per vehicle (ACV). However, BHPH dealers who focus on what they can control are faring better with customers and profits. A good place to start is to seek outside expertise from professional associations and your CPA.

Current Expected Credit Loss Model (CECL) and Data Collection

Category: Auto Dealerships

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