Category: Auto Dealerships

Posted on Nov 3, 2016

There are three key advantages for buy here pay here (BHPH) auto dealers to establish a strong partnership with their CPA firm: maintaining compliance on bank financing, filing an accurate and clean tax return and operating at a profit. When these three advantages are realized, the dealership is set up properly to sustain cash flow and avoid costly penalties by state or federal agencies like the IRS. In this article, we explore common accounting mistakes made in BHPH dealership structure in the areas of discounting, reporting, remitting sales tax and customer service — and how to add more structure to efficiently scale up your operation.

Used cars are in high demand — and not just by people with no credit or bad credit. Debt-averse consumers of all stripes are shopping a wide variety of used inventory online or with their favorite dealer.

Sub-prime lenders also view used cars as a hot commodity again, and have become competition for buy here pay here dealers and their Related Finance Corporations (RFCs). As the industry saying goes, “NOW is the best time…” for BHPH dealers to make sure their systems and records are efficient and clean to compete in this competitive landscape.

There are three distinct advantages to operating a clean and efficient BHPH dealership. Dealers can more easily document and satisfy bank financing terms during an audit. They can plan ahead and file an accurate tax return and remit accurate sales tax. They can also attract and keep more customers in vehicles for a longer period of time.

In our experience, problems with accounting or collections or sales tax remittance often don’t come to light until an audit or tax return preparation. That timing may lead to a costlier process to fix problems, including potential penalties by the IRS, state department of revenue or even the Consumer Finance Protection Board (CFPB).

For a few hours a month — and the right knowledge about which data to record and which reports to review — your dealership can be efficient, competitive and scalable. The following blogs contain key ways to add structure to your BHPH dealership, based on popular topics discussed at the 2016 NIADA National Convention in Las Vegas.

If you are looking for a strong CPA partner to assess your software, budget, KPIs or processes, talk to the business services group at Cornwell Jackson. We work with dealers on a monthly basis to keep their accounting and reporting organized for proper compliance, better cash flow and enhanced profitability. Plus, we understand the regulatory issues and competition that impact the bottom line of this industry.

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 healthcare, real estate, auto, transportation, technology, service, retail and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Related Posts

Posted on Oct 26, 2016

If you are not doing everything you can to be the BHPH dealer of choice, it may be time to ask the question: Why should the market allow your business to exist?

In this very consumer-driven market, cars are commodities. Start-up dealers should not operate as BHPH based on a few self-financed used cars. It is too expensive a proposition and too regulated without a clear business and community purpose.

Are you fulfilling an unmet need? Are you offering a wide selection? Do you accept trade-ins? Are you a fair dealer with a service focus? What is different about your dealership that will build a solid foundation for referrals?

Many new business owners begin with a business plan, usually to satisfy bank or partner requests. But a plan is also good for the owner to outline the exact research, steps and benchmarks to support success.

After writing the plan, expect to make changes along the way. You don’t have to follow things that aren’t working. You should also anticipate what-if scenarios and be ready with alternative steps.

Some key KPIs for start-up dealers can include:

  • Customer visits/calls per day to sell one car
  • Gross profit per car
  • Net income projections (gross minus expenses per month)
  • Cash on hand (2.5 times monthly expenses recommended for 2017)
  • Retained earnings (to put back into buying cars rather than bank financing)

Following a few key KPIs can help you measure whether the dealership is on track or if it will run out of money. KPIs can also help you monitor and identify unnecessary expenses or staffing issues.

At first, start-up dealers will be wearing all the hats. They will buy the cars, manage the books, sell the cars, communicate with customers and collect payments. When it’s time to hire some help, dealers usually hire office support staff to answer phones and handle repetitive processes. Then comes a salesperson or someone in collections. Before hiring, dealers should understand what they do best and where their time should best be spent for the benefit of the business. Hire employees who are strong in key areas to balance the dealer’s strengths and skills.

As you hire more people, you will need clear, repeatable processes for operating the business — even if you’re not there all the time.

  • What is the process for purchasing? Reconditioning?
  • What is the process for taking in trades, selling and delivering and servicing vehicles?
  • What is your process for accurately remitting sales tax?
  • What is your collections process?

A process manual should be part of every independent used car department, and used for training and a back-up plan if a key employee isn’t available to perform the tasks. Once created, it needs to be updated annually or as necessary to remain relevant.

Like any business, a buy here pay here dealership is created to serve a market demand and to make a profit for its owners. It can also have the side benefits of creating good jobs and helping other people keep jobs by having reliable transportation. The pressure to succeed is higher as competition increases, but the most successful dealers will put the right tools and safeguards in place to scale up and build a positive reputation.

If you are looking for a strong CPA partner to assess your software, budget, KPIs or processes, talk to the business services group at Cornwell Jackson. We work with dealers on a monthly basis to keep their accounting and reporting organized for proper compliance, better cash flow and enhanced profitability. Plus, we understand the regulatory issues and competition that impact the bottom line of this industry.

Download the Whitepaper Here: How to Add More Structure and Scalability to your BHPH Dealership

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 healthcare, real estate, auto, transportation, technology, service, retail and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Related Posts

Posted on Oct 20, 2016

The tried and true formula to increase profitability is to either increase revenue or reduce expenses. Is your dealership as profitable as it could be? Is there room to improve your BHPH Budget? How do you know?

You could compare your dealership to other BHPH dealers and against industry benchmarks. If you discover that you are receiving less gross profit per car than the industry benchmarks, you may be leaving money on the table. It could be time to reassess your plan…or your plans.

BHPH dealers need several plans to oversee their budgets because it is a very cash intensive business. Your plans should include:

  • Six to 12 month revenue plan
  • Expense plan
  • Profit plan
  • Cash flow plan

In your cash flow, for example, if you are budgeting a $1,500 average in down payments but are really averaging $700, you will run out of money to buy more cars. If you are budgeting your expenses based on this cash flow, your budget will be off quickly.

In your revenue plan, are you projecting net new account growth or is it going to shrink? The more mature a portfolio gets, the harder it is to attain new growth (e.g. 20 paid off, 20 charged off, 40 loans a month = zero growth). Some dealers choose to chase aggressive sales without considering if the deal is a good one to put on the books. Charge-offs will eat up profitability more than any other expense, and it is usually a self-inflicted expense due to poor deal structures and underwriting.

Poor deal structures and underwriting sometimes stem from a lack of training for staff. Dealers should consider staffing and proper training as investments in gross profit rather than as expenses. Too few or untrained staff lead to shortcuts and mistakes. As you gain productivity from staff and consistency in deal documentation and communication, you can increase your gross profit per sale.

Plan your expenses in advance as you do your revenue projections. You should know your expense per car sold, including closing and underwriting costs, staffing, service and follow-up care and collections.

Continue Reading: Start-up dealer? Do it right the first time.

If you are looking for a strong CPA partner to assess your software, budget, KPIs or processes, talk to the business services group at Cornwell Jackson. We work with dealers on a monthly basis to keep their accounting and reporting organized for proper compliance, better cash flow and enhanced profitability. Plus, we understand the regulatory issues and competition that impact the bottom line of this industry.

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 healthcare, real estate, auto, transportation, technology, service, retail and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Related Posts

Posted on Oct 14, 2016

 

Collections best practices are designed to increase the number of payments received on every contract — increasing cash flow and potentially increasing sales from referrals. A shut-off box on a car is no substitute for good collections practices. You are also discouraged from making field calls, as it can violate CFPB rules — not to mention be potentially dangerous. The key is to make your payment a top priority in the mind of the customer, specifically because customers trust and perceive that your dealership is willing to work with them to find a solution.

Nothing can really motivate a customer to pay for a car except a strong relationship. This approach is harder than billing and repossession. It takes a different mindset among your collections and service staff, but it can be efficient if you establish a positive rapport and understanding from the beginning of the transaction.

Your process and paperwork should be consistent and clean every time, no matter who is closing the deal. Emphasize that you expect payments on or before the agreed due dates. If you can, set up an electronic funds transfer (EFT) with customers around their payroll time. You can’t require it, but you can make it attractive by offering a discount. Outline the process of what will happen if they can’t pay on time. If the car malfunctions and if they need to re-figure the payment terms due to a change in circumstances, talk through those situations too.

Establish a clear process for communicating, which in some cases may be opt-in text messaging. You can now use SMS for automatic payment reminders, service reminders and late payment notices. In any and every case, keep the lines of communication open.

Follow up with a check-in call. Congratulate customers on their purchase and ask them if they have any questions. Make it clear that your team is there to help, so that their first contact with you is positive rather than a delinquency call. Provide clear contact information for customers to reach their “account rep.”

Results show that a strong closing process with full disclosure followed by a welcome check-in call reduces the need to chase down payments and also increases the number of payments made. This won’t happen on every transaction. There will still be cases of repossession, but dealers can reduce the chances. A full inventory of cars is not what you want.

Deal with service issues quickly.

One of the biggest reasons that customers stop making payments is that the car has a problem. Make it clear during the closing process that any issues with the car will be handled, whether through a limited warranty or service call. Depending on the issue and timing, work out how the customer will participate in paying for the service. Calculate the cost of the repair against the benefit of more monthly payments, and often the benefit is on the side of more monthly payments and a happy customer willing to refer your dealership to friends and family.

Keep in mind that your inventory is not your biggest asset; your portfolio is the golden egg. Accounts need to be worked every day by collections; don’t just wait for the phone to ring. A 30-day past due notice equals four to six missed payments. If you have 100 accounts, a good rule of thumb is to have four collections staff and one part-timer in the wings to pitch in when necessary.

Continue Reading: Budget and Expense Oversight

If you are looking for a strong CPA partner to assess your software, budget, KPIs or processes, talk to the business services group at Cornwell Jackson. We work with dealers on a monthly basis to keep their accounting and reporting organized for proper compliance, better cash flow and enhanced profitability. Plus, we understand the regulatory issues and competition that impact the bottom line of this industry.

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 healthcare, real estate, auto, transportation, technology, service, retail and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Related Posts

Posted on Oct 7, 2016

One of the common questions we hear from BHPH dealers, aside from how to get financing, is “am I doing the accounting correctly?” Although BHPH dealers have very robust dealer management software to track inventory, sales and customer accounts, they must consistently input the right data to leverage the software’s functionality.

Dealer Management Software

Common problems we see in dealer reports when working with clients include improper set-up of the chart of accounts, incorrect discounts recorded in the book of notes, and inaccurate deferred income (which impacts accurate sales tax remittances). If the dealer has an RFC, we will find that notes are improperly recorded when passed back and forth between the dealership and the RFC after sales and repossessions. Inaccuracies can lead to tax noncompliance and penalties in addition to inaccurate financial statements.

When setting up dealer management software, there are few shortcuts in the beginning. Ideally, staff is properly and frequently trained on better ways to use the system. There are also standard forms that can be used as templates and customized to simplify documentation and reporting, such as:

  • Sales applications
  • F&I forms
  • Disclosure forms

Sometimes the standard forms are just fine to start with, and as the dealership grows, staff may prefer customizing the reports for easier review and decision making.

Monthly or quarterly, the system should be reviewed for any recording errors or miscalculations, which will save the dealership time and money when it is time to remit/file taxes or report to financing partners.

Continue Reading: BHPH Dealer Collection Best Practices

If you are looking for a strong CPA partner to assess your software, budget, KPIs or processes, talk to the business services group at Cornwell Jackson. We work with dealers on a monthly basis to keep their accounting and reporting organized for proper compliance, better cash flow and enhanced profitability. Plus, we understand the regulatory issues and competition that impact the bottom line of this industry.

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 healthcare, real estate, auto, transportation, technology, service, retail and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

 

 

Related Posts

Posted on Oct 5, 2016

 

Consider this scenario: A small dealer isn’t looking to expand its business when an opportunity arises. A well-known-brand franchise in the area is up for sale. The franchise’s owner is losing money but the small dealer’s owners think they could turn the dealership around. New car sales are strong and financing is currently attractive. Should this motivated entrepreneur buy the business?

What Manufacturers Might Require

When considering a second franchise, you’ll want to take a close look at what the manufacturer will require. Is your existing manufacturer offering the second franchise? If so, it might allow you to stay in the same facility but require you to build a separate showroom or segregate your showroom area for the two brands.

Some dealerships are able to solve the dual franchise problem by hiring a receptionist to direct customers to separate showrooms as well as separate customer waiting and service areas.

If your manufacturer thinks you lack sufficient space, it may require you to open a second facility. It also might require you to dedicate one or more salespeople to the additional franchise and may try to make changes to your current sales and service agreements that you might not agree with.

If the second franchise represents a different manufacturer, the plot will thicken. The second manufacturer — or your existing factory — may have a long list of requirements that necessitate opening a new facility and running the new franchise separately.

Purchasing a second franchise is one of the biggest moves a dealer can make. Here are six steps to take in the decision-making process.

1. Choose the Right Franchise

Is the brand you’re eyeing likely to sell in your market? Just because you’ve always liked, say, Lincolns — and several of your customers have expressed interest — doesn’t mean they’ll sell well for you. Base your decision on solid data, not on instinct.

Consider whether the franchise is high-quality, is on the rise and matches up with your area’s demographics.

The manufacturer can provide sales projections and even assist in (and possibly pay for) market research. Don’t stop there: Seek hard data, including the failure rate, from objective third parties. Some financial analysts, for example, track auto manufacturer franchises, and your Dealer 20 Group may have additional information.

2. Determine if the Price is Right

The price of the franchise will probably be the deal maker or the deal breaker. As you evaluate the price, you’ll need to account for your short- and longer-term costs, including:

  • Altering or expanding your store, or building a new facility (see the right-hand box for some possible requirements from the manufacturer).
  • Adding to your sales force and back-end staff, and
  • Training staff on the new brand and manufacturer’s procedures.

One word of warning: A new franchise normally will operate under working capital constraints. Be sure that you won’t be strapped with too much debt service as a result of overspending.

Additionally, what is being purchased matters — that is, assets or stock. Asset-based purchases are more common for dealerships, but corporate stock purchases still exist. Future federal tax expense becomes a crucial consideration when determining how the deal is structured. An asset sale can favor the purchaser because costs can be recaptured more quickly through depreciation.

But the seller may prefer a stock sale because the tax paid on the gain often is levied at a lower rate. That means the seller may be willing to accept a lower price for a stock deal than for an asset-based transaction. For the buyer, a lower price might make up for missing out on the depreciation advantages of an asset sale — but the buyer also needs to be concerned about future unknown liabilities that could arise with a stock purchase.

Consult with your tax adviser about your situation so the best tax results are achieved.

3. Project Profitability Carefully

You should be able to find out the current franchise owner’s record of profits — or losses — fairly easily. But bring your financial adviser into the analysis to help identify any hidden losses or exaggerated profits. Annual losses, however, aren’t as much of a yardstick as you’d think, because the business is likely to be run very differently under your ownership.

What is extremely important when calculating profitability is the franchise’s purchase price and the value of its goodwill and potential sales volume. Is there enough opportunity for change in the business’s operations to achieve the profitability you’re projecting?

4. Assess the Impact on Your Franchise

If the second franchise is a standalone business, its profits and losses will be calculated separately from those of your first franchise. But if you’re putting both franchises together in the same corporate structure, you’ll need to assess whether the newcomer franchise will add value and profitability to your existing business.

Or will the second franchise rob your first franchise of sales? Be sure to estimate the retail impact of this “in-house” competitor carefully.

5. Weigh in on Staffing

You’ll likely have to hire additional staff for your new franchise operation. An exception: If you’re housing both franchises under one roof and can dedicate one or more salespeople from your current staff to the new endeavor. But you’ll still need to consider how the new line of business will stretch your management team, your back office and every other part of your operations.

6. Bring in an Expert

Your CPA can be a crucial peg in your decision to add a franchise. He or she can assist in:

  • Determining whether the franchise price is fair;
  • Performing due diligence to authenticate that what you’ll receive is what’s being represented; and
  • Conducting a sound business evaluation of all the factors mentioned above to determine whether the second franchise is a good idea or a bad one.

Last but not least, your CPA can assist in the submission of paperwork to the manufacturer for the approval of the sales and service agreement.

Opportunities and risks: Adding a second franchise is a way for capable entrepreneurs to take advantage of market opportunities and expand their businesses. But a second franchise carries just as much risk as any other investment, and you need a proven business strategy to make it all work.

Related Posts

Posted on Sep 1, 2016

 

Do you consider the finance and insurance (F&I) department to be a profit center or bottleneck? Some dealers have eliminated the F&I department to save overhead and expedite the car buying experience. But F&I and service contracts are often an auto dealer’s bread and butter, especially as increasing buyer awareness and market competition squeeze new and used car margins.

Should your dealership cut F&I? Or will the strategy backfire over the long run?

Merging F&I with Sales

When a dealership eliminates the F&I department, those duties are handed over to the sales department. So, in addition to regular sales tasks — demonstrating vehicles, locating buyers’ dream cars and negotiating deals — salespeople are also expected to:

  • Finance deals;
  • Sell leases,
  • Prepare credit insurance and service contracts;
  • Complete the paperwork; and
  • Disclose all F&I terms and conditions.

The idea of eliminating F&I processes appeals to many buyers, especially younger ones, who dislike being shuffled among several dealership employees during the car-buying experience. They want one-stop shopping and full disclosure.

But can you simply cut the F&I manager out of the equation? Old-fashioned dealers question how a merger between F&I and sales will affect their dealership’s long-term performance.

Testing the Merged Approach

Team One, a research and training company for the U.S. and Canadian auto industries, conducted a limited study to evaluate the effects of eliminating F&I. The test group consisted of top performing salespeople who were trained about F&I products, interest rates, full disclosure rules and legal issues. The control group was an effective, up-and-running F&I department at a similar dealership.

Comparisons between these two groups showed that properly trained salespeople were initially able to produce comparable F&I sales volume and penetration levels using pricing menus. But these levels dropped off in a matter of weeks. Retraining and follow-up helped keep salespeople focused on F&I, but they generally reverted to doing what they know best — selling new and used vehicles.

More serious were the adverse effects the test group had on customer service scores and contract cancellations. Many customers were frustrated and confused when the salespeople completed the paperwork and explained financing terms. Even well-trained, honest salespeople had a hard time providing full disclosure.

Retooling F&I

Team One’s study suggests that merging F&I and sales can work if you have a strong, competent sales team and if you are committed to training them on a regular basis. It’s also helpful to create a consistent F&I pricing menu if you plan to merge F&I with sales.

A less radical move might be to keep the F&I department and, instead, overhaul the selling process from start to finish.

Here are three tips to make transactions go more smoothly:

1. Involve your F&I manager early on to improve workflow, build rapport and bring F&I into the purchase price equation.

2. Send your F&I manager to ongoing training courses to stay on top of the latest F&I technology, product and regulatory trends.

3. Create a non-threatening, full-disclosure environment inside the F&I office. If the F&I manager is slow, disorganized or grouchy, it may be time to retrain him or her — or reassign your old manager and start using a new one.

The process of buying and financing a car should be low-pressure and streamlined. Consumers need an F&I manager who has the knowledge and patience to help them understand and evaluate their options before signing on the dotted line.

Is Your Dealership Handling these Issues Effectively?

Your F&I manager must comply with the latest rules and regulations, governing these credit-related issues:

Identity theft. Federal and state governments expect auto dealerships to help them fight consumer identity theft. The F&I manager must comply with the federal Privacy Rule, Safeguards Rule and the Red Flags Rule. Are you using the most updated version of the SEC’s Privacy Notice? Are you conducting regular safeguard audits? When is the last time you updated your written Red Flags policy? Owners may not know these answers, but F&I managers should.

Deceptive practices. F&I managers also should know what’s required and prohibited under the Deceptive Trade Practices Act. If not, your dealership could face a class action lawsuit for items such as payment packing or discriminatory pricing.

Bank fraud. Banks are required to file Suspicious Activity Reports (SARs) anytime they suspect misleading or altered loan applications. Dealers must be careful how they enter information from a customer’s handwritten application into credit aggregation systems. For example, F&I managers can’t overstate or combine an applicant’s income or misstate a job title. SARs can tarnish your reputation and lead to credit application denials.

Disclosures. Consumers also can file complaints or sue your dealership if the F&I department omits or inaccurately states the disclosures required under the Truth in Lending Act, Consumer Leasing Act, Privacy Rule, Used Car Rule, Risk-Based Pricing Rule, and other applicable federal and state laws and rules.

Dealerships must comply with more than 85 different federal regulations and states have additional requirements, according to the National Association of Automobile Dealers. A knowledgeable, efficient F&I department protects your dealership against credit-related fraud and lawsuits.

Related Posts

Posted on Jul 28, 2016

Your dealership likely prepares and sends operating reports to your manufacturer every month. How you use the reports beyond sending them to the factory can have a big impact on your dealership’s profitability.

Here are three ideas for using your monthly operating report as a tool to stay on track as the year progresses.

1. Keep an Eye on Revenue.

Every manufacturer’s report is different, but yours likely contains, in some format, a summary of that month’s operating revenue. These figures can quickly tell you which departments are the moneymakers and which lag behind expectations.

Let’s say that the current month’s operating report for a dealership shows that it brought in the following in gross revenues: $2 million in new car sales, $750,000 in used car sales, $140,000 in parts sales, $61,000 in service income and $56,000 in body shop income.

You also can see how income from your store’s various departments compare with the prior month, as well as a year ago, the dealership’s projected budget, benchmarks and so on. Let’s assume that you projected $2.25 million in new car sales for the current month. With sales coming in at only $2 million, you are concerned that first quarter sales are off to a slow start and, thus, choose to move up by several weeks a new car sales promotion you had planned to run in two months.

Another example involves gross revenue versus turnover. Take Dealer A, who buys a vehicle for $20,000, holds it for 90 days and finally sells it making a $3,000 gross profit. Many dealers would be pleased with this outcome. But let’s also consider Dealer B, who spends the same $20,000, sells the vehicle in 30 days but only achieves a 10 percent profit margin or $2,000 gross profit. The difference is that Dealer B does three times the sales in the same 90 days, doubling his total gross income compared to Dealer A.

There are many other ways to use your operating report to analyze front-end operations.

2. Figure Out the Reasons Behind the Numbers.

When you analyze the back end of your operations, for example, you’ll look at income and expenses in the service, parts and body shop departments.

Let’s say that you have a gross profit of $33,000 in the service department. This alarms your manufacturer, because it’s less than 55 percent of your monthly service sales and shows that your gross profit percentage has slipped from the target of 65 percent. But it shouldn’t be a major concern if the reason for the shortfall is that the department was busier than usual refurbishing used cars for sale next month — and profits for that venture won’t start showing up until the following month.

3. Consider other Benchmarks.

Monthly operating reports are also a way for you to measure your dealership’s performance against more complex benchmarks. Consider, for instance, the concept of “service absorption.” This is defined as the sum of total parts, service and body shop gross profits divided by the sum of total fixed expenses plus dealer salary plus parts, service and body shop sales expense. (If your report doesn’t have this category, you could calculate it from the other data provided.)

Let’s say that your store’s benchmark range for service absorption is 85 to 100 percent, but your current operating report shows your store coming in at 83.8 percent for the month. This figure is only slightly below the bottom of your benchmark range. Nonetheless, you might want to take steps to lower expenses or bump up revenue for the next month to be sure your store is in the benchmark range.

Achieving a service absorption of 85 percent or higher will give you a competitive advantage over your competition, because the new and used departments only need to cover 15 percent or less of your dealership’s total fixed expenses. Thus, you can afford to take less gross profit on an individual sale.

Knowledge Can Be Golden

By studying your manufacturer’s operating reports, you can arrive at countless insights, from your day supply of vehicles to the gross profit per technician to determine an adequate employee count in the back end. All of this knowledge can be golden, because it helps you recognize strengths, pinpoint weaknesses and set goals for the rest of the year. Don’t let it go unnoticed.

Related Posts

Posted on Jul 21, 2016

If your dealership’s new car sales are putting a smile on your face and your used car and service departments are merrily humming along, you might think now’s the time to give yourself a hefty — and perhaps overdue — pay increase.

But before you compensate yourself for the amount you believe you deserve, take stock: The IRS is in the business of scrutinizing top executives’ salaries, bonuses and distributions or dividends. Various stakeholders also may be examining your self-compensation decisions. Here are some factors to consider before setting your new pay.

What’s the Right Balance?

Let’s start with the basics. Your compensation is obviously affected by the amount of cash in your dealership’s bank account. But just because your financial statements report a profit, it doesn’t necessarily mean you’ll have cash available to pay owner-employees a higher salary or large bonus or make annual distributions. Net income and cash flows aren’t synonymous.

Other business objectives — such as buying new equipment, repaying debt and sprucing up your showroom — vie for your kitty. So, it’s a balancing act between owner-employees’ compensation on the one hand and capital expenditures, expansion plans and financing goals on the other.

What if Your Dealership Is a C-Corporation?

If you operate as a C corporation, your dealership’s income is taxed twice. First, it’s taxed at the corporate level. Then, it’s taxed again at the personal level as you draw dividends — an obvious disadvantage to those owning this corporation type.

C corporation owner-employees might be tempted to classify all the money they take out as salaries and bonuses, which the company can deduct, to avoid the double tax on dividends. But the IRS is wise to this strategy. It is on the lookout for excessive compensation to owner-employees and may reclassify above-market compensation as dividends, potentially resulting in additional income tax as well as interest and penalties.

The IRS also may monitor a C corporation’s accumulated earnings. Generally similar to retained earnings on your balance sheet, accumulated earnings measure the buildup of undistributed earnings. If these earnings get too high and can’t be justified for such things as a planned expansion, the IRS may assess a tax on them.

What about S-Corporations?

S corporations, limited liability companies and partnerships are examples of flow-through entities, which aren’t taxed at the entity level. Instead, income flows through to the owners’ personal tax returns, where it’s taxed at the individual level.

Dividends (typically called “distributions” for flow-through entities) are tax-free to the extent that an owner has tax basis in the business. Simply put, basis is a function of capital contributions, net income and owners’ distributions. Distributions in excess of basis are subject to ordinary income tax, but they’re not subject to payroll taxes.

So, the IRS has the opposite concern with flow-through entities: Agents are watchful of owner-employees who underpay themselves to minimize payroll taxes. If the IRS thinks you’re downplaying salary in favor of payroll-tax-free distributions, it may reclassify some of your distributions as salary. In turn, while your income taxes won’t change, you’ll owe more in payroll taxes — plus any interest and penalties due.

Do You Reflect the Market?

Above- or below-market compensation raises a red flag to the IRS, and that’s definitely undesirable. Not only will the agency evaluate your compensation expense — possibly imposing extra taxes, penalties and interest — but a zealous IRS auditor might turn up other challenges to your records.

What’s more, it might cause a domino effect, drawing attention in the states where you do business. Many state and local governments face budget shortages and are hot on the trail of the owner-employee compensation issue.

Who Else Might be Concerned?

Other parties may have a vested interest in how much you’re getting paid, too. Lenders, franchisors and minority shareholders might think you’re impairing future growth by paying yourself too much.

If a silent owner, factory representative or lender, for instance, decides your showroom looks shabby and sees flat sales, your salary expense and dividends might become the subject of debate.

Here Comes the Judge

If you or your dealership is involved in a lawsuit, the courts might impute reasonable (or replacement) compensation expense. This is common in divorces and minority shareholder disputes. The amount a court prescribes for compensation affects business value, which, in turn, affects damages awards and asset distributions. In divorce, reasonable compensation also affects child support and alimony awards.

When a court imputes reasonable compensation, it typically considers compensation studies and other factors that include salary history, responsibilities, experience, geographic location and the dealership’s performance.

Are You Being Prudent?

One of the major advantages of being a dealership owner is having a big say in all manner of decisions. But when it comes to your compensation, make sure you’re being prudent. Otherwise, you may find yourself in hot water with the IRS and others who have an interest in your business.

 

Related Posts

Posted on May 31, 2016

There are two schools of thought when creating cash flow for a buy here pay here auto dealership. One involves selling cars as quickly as possible and repossessing them just as quickly. The other more viable option is to focus on customer service. By keeping customers in a vehicle longer, the dealer can also secure steady cash flow and support repeat customers as well as referrals. Dealers, collections staff and service technicians are all involved in the customer experience. This article reviews the benefits of a customer-centric approach to cash flow and financial management and the tools that help dealers achieve more profitable payment streams.

Build in Safeguards for Bad Breaks with BHPH Bad Customers

Not every customer will respond positively to improved customer service at a buy here pay here dealership. There will be times when some customers take advantage and eventually stop paying and communicating. Be prepared for a level of default and repossession from bhph bad customers. Build that expected percentage of defaults into your budget while focusing the majority of your efforts on well-intentioned customers who need the option your dealership offers.

Don’t assume it’s a customer issue until you explore the situation. If collections start to dip, check in with collections staff to make sure they are reaching out to customers regularly, assessing the situation and discussing payment options. At times, you may find that collections outreach is inconsistent; that is an internal operations issue rather than a customer issue. Check the call logs to determine where and when the communications process is breaking down. It may also be a matter of how collections staff are communicating with customers. In this case, you will need more training around appropriate or scripted conversations that support a positive customer response and cooperation. Collections conversations about repossession are very different than conversations that encourage a customer to get current on payments.

If your staff is unable or unwilling to work in this new model, it may be easier to replace staff and promote “new management” to encourage more customer interest and communication. This includes anyone who will interact with customers. The longer you wait to reeducate staff and get customers talking, the more likely you will lose the payment stream and deal with more repossessions.

Slower collections, however, may also reside with a dealer who is not pulling and reading reports every week — or at least biweekly. If the dealer doesn’t have the time to pull and review reports regularly, assign a back office team member to the task who can pull reports and summarize findings.

One important factor for achieving regular payment streams is how the payments are set up in the first place.

Customers in buy here pay here arrangements typically make weekly or biweekly payments, sometimes in person. Payments should be set up according to how the customer gets paid, which is usually weekly or every other week. For other customers, their income can change during the year. It’s much easier to handle a collections issue later if you are aware of how the customer gets paid, what could hinder the customer from paying and how you will resolve a cash flow issue on the customer side if and when it happens.

Meet with your CPA every month or quarter to gain insight on reporting and budgeting improvements as well as cash flow projections for the dealership. Your CPA will not make customer service calls for you or force you to design and read more accurate reports. But we can make sure the software is set up properly to provide up-to-date and helpful reports. CPAs familiar with buy here pay here can also identify the information dealers should pay attention to in a customer-centric environment.

Dealers will still have to repossess vehicles even with good customer service. So why make the switch? The simple answer is that valuation of the dealership is tied to strong collections, a well-performing loan portfolio and healthy margins. Lenders and investors consider these areas of the operation carefully when deciding to extend credit. At least one investment group we know of required a dealer to switch to the customer-centric approach as a way to improve cash flow.

If you think this approach could work better for your dealership in the long run, talk to the auto dealership team at Cornwell Jackson.

Download the Whitepaper Here: Customer Service: A Better Approach to BHPH Cash Flow

Mike Rizkal, CPA is the audit and assurance partner in Cornwell Jackson’s assurance practice and auto dealership segment. Mike utilizes his real world practical experience to provide consulting and accounting services to buy here pay here owners and managers across North Texas.

Related Posts