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 efficient financial management and the tools that help dealers achieve more profitable payment streams.

All dealerships need an effective way of tracking the number of customers they have and current level of collections. If customers are behind on payments, then dealers need to know the level of delinquency to prioritize which accounts need attention first. Again, the longer a delinquency is left unchecked, the more likely you are to lose that customer and default to repossession.

There are several software packages that support dealership efficiency, including but not limited to AutoStar, Finance Express/Dealer Socket, Frazer and Dealer-mate. The software must be used properly and regularly for a customer-centric approach to succeed. In a repossession approach, dealers simply wait for legally sanctioned delinquency. In a customer-centric approach, dealers must look at reports weekly. They will look for signs of changes in payment streams, then communicate with collections staff who must reach out to those flagged customers.

Once collections improve, the reports can tell dealers how to improve budgeting, track inventory and monitor related finance company (RFC) reimbursements (if applicable). The software can also be tailored to provide reports to the dealership that are most meaningful.

Some of the reports and elements of reports that dealers should pay attention to include:

• Inventory Listing

This keeps track of cars available for sale. It should include the purchase price at the cost to dealer plus an amount for make-ready costs (expenses incurred to bring vehicles up to selling condition). Many dealers affix a standard cost to apply to vehicles to make them ready for sale based on historical trends. Some do try to assign exact costs, but the recordkeeping for this can be cumbersome. A compromise would be to use the standard cost for most vehicles and add large, specific make-ready expenses if applicable.

The inventory list is also used to reconcile against the lender’s floorplan records. While the dealership’s profits are primarily earned through interest, maintaining appropriate inventory costs (by not overpaying for inventory) is still a critical piece for a healthy dealership.

• Accounts/Notes Receivable (dealership’s portfolio)

Dealers should keep track of all open accounts and note the accounts that are past due. This report can also separate the components of the loan between the principal balance, current balance, accrued interest, sales tax, and discounts – original and current.

• Charge offs

After reviewing the A/R reports, this report gives the dealer a list of every account that will no longer be collected. This is useful for year-end reporting, as the IRS requires Form 1099-C (cancellation of debt) to be issued to these customers. The penalties for noncompliance here are steep, so it’s worth it for the dealer to keep accurate records.

Some dealers only move a small portion of their loans to the full charge-off stage, as issuing these forms can drive away potentially good future customers. If you don’t expect (or want) the customer to return, consider a full charge-off.

• Cash Flow Report

This is different from the cash flow statements included in GAAP financial statements. This is a report out of the dealership’s sales software that shows the amount received from customers. It will separate the payments between down payments, interest, principal, sales tax and unearned discount. Some dealers keep track of their cash flow by the number of open, current accounts. For example, if they have 100 current accounts paying $400 per month, they know they should be receiving $40,000 per month. This can even be broken down bi-weekly or weekly depending on the dealer’s needs.

This report also helps track the payments to the actual bank statement and can be reconciled with the monthly expected cash flow receipts from the account/notes receivable report.

• Sales Tax Reports

These are compliance based, but are important. This report keeps track of sales tax due. For certain states, sales tax is due in full when the car is sold. However, for other states, (i.e. Texas), the sales tax is due as the payments are collected. The sales tax report works in conjunction with the A/R and cash flow report to make sure the dealer is paying sales tax only as the monthly payments are received.

In states where the law requires sales tax payments as money is collected, this approach improves the dealer’s monthly cash flow.

While all of these reports are very helpful in running a buy here pay here dealership, it is also important to maintain the company’s Balance Sheet, Income Statement, and Statement of Cash Flows as part of financial statement audits and potential IRS examinations.

Software investment and tracking can pay dividends. One dealer we know is one of the most profitable in the region with several locations and many loyal customers. He credits it to the customer-centric approach of keeping the customers he has, getting referrals and reducing his inventory costs, major repair costs and sales quotas. And who doesn’t like profits?

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

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.

Customers at buy here pay here lots may be down on their luck or simply looking for a short-term solution to their transportation needs. Regardless, the industry norm of high default rates has inspired some dealers to manage cash flow through repossession. They sell cars quickly and repossess them just as quickly — only to resell them again. A customer who fails to pay is an opportunity rather than a liability.

And yet, dealers interested in stronger financial management are choosing an alternative. It’s called customer service. Before we go down the road of discussing transient, hard-to-reach clientele, abandoned cars and months of missed payments, let me say that customer service in the buy here pay here world means something different than your average retail scenario. The ultimate goal is to secure a longer stream of monthly payments per customer — knowing that very few loans will get paid in full.

Change Your Service Mindset for Buy Here Pay Here Dealerships Customer Service

If a dealership is operating on the repossession model, it will take time to develop a focus on customer service. First of all, the sales process must shift from a focus on getting the car sold to a focus on learning about the customer. Each customer will have unique expectations, needs and approaches to problem solving and communication. This information will be important if the dealer’s mindset is now to keep the customer in a car and to collect payments.

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, eliminate this common excuse for non-payment and stay in contact with more customers.

Other examples of establishing regular communication and service include offering regular spot checks on the vehicle, letting customers upgrade to a nicer model and keep payments the same. Dealers may also offer to pick up a vehicle free of charge if it breaks down. While it seems that all the work and expense is on the dealer’s side, the benefit of extra service is to sustain thousands in payments each month while reducing the need to sell as many cars per month.

At the same time, the customer may feel more loyal for the help provided…and refer friends and family.

Get Your Team on Board for Customer Service Changes

For this customer-centric approach to work, the dealer must get buy-in from the entire team. This includes reception and collections staff and service teams. If, for example, the collections staff is now focused on keeping a customer in a vehicle rather than repossessing it, their communications style has to change. They also must communicate with customers as soon as a payment is missed rather than waiting 60 to 90 days to meet legal requirements for repossession.

Collections staff must be trained to ask more questions when calling about missed payments and to show sympathy by offering some solutions. They can ask the customer to come in and make a payment. They can offer a discount if the payment is made within the week. If the car is broken down, they can discuss repair options. Sometimes it is helpful to review the payment history and the customer’s income arrangements to discuss paying ahead when cash flow is healthy and then having a couple weeks or months of no payments when cash flow is thin.

Service technicians must provide a cordial environment to support the customer relationship. Their goal has changed from getting a job done to keeping a customer happy.

Follow a Consistent Strategy

A dealership cannot focus on repossession and also provide good customer service. A consistent, customer-centric approach looks more like this:

• Review all existing customers on a weekly basis and identify which customers are currently behind on payments.
• Contact customers and invite them to the dealership to talk about getting current on payments.
• Offer a list of options that can support up-to-date payments.
• Once customers visit the dealership, provide a welcoming experience that demonstrates your interest in keeping the relationship.
• Outline a plan to continue the payment stream:
  • Get the vehicle in and inspect it or 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
• Follow up and stay in contact through in-person visits as much as possible.
• Monitor payment habits and communicate as soon as there is a change.

Once the customer-centric approach is in place and working consistently, dealers can start to calculate how many customers making regular monthly payments are needed to support a consistent budget and profit margin. This can help dealers plan ahead by creating a fund to cover customer vehicle repairs, upgrade the service area or advertise. This consistent approach can also reduce the required quota on new sales per month, and therefore investment in new inventory.

If you think this approach could work better for your dealership in the long run, talk to the auto dealership team at Cornwell Jackson. To learn more, download the full article here.

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.