Tag: cpa in dallas

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.

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Posted on Dec 12, 2016

advisory services, business tax, business services, tax services, CPA in DallasBusiness tax credits are particularly beneficial for planning because they reduce tax liability dollar-for-dollar. The Protecting Americans from Tax Hikes (PATH) Act of 2015 has made permanent the research credit and extended but not made permanent other credits, including the Work Opportunity credit (through 2019). Let’s explore a few details of these business tax credits.

Research credit

Also known as the Research & Development (R&D) credit, it gives businesses an incentive to step up their investments in research and innovation. The PATH Act permanently extends the credit, allowing businesses to earn a credit for pursuing critical research into new products and technologies. Plus, in 2016 businesses with $50 million or less in gross receipts can claim the credit against AMT liability. Certain start-ups (in general, those with less than $5 million in gross receipts) that haven’t yet incurred any income tax liability can use the credit against their payroll tax. While the credit is complicated to compute, the tax savings can be worth the effort.

Work Opportunity credit

This credit is for employers that hire from a “target group.” It has been extended through 2019. Starting this year, target groups are extended to include individuals who’ve been unemployed for 27 weeks or more. The size of the tax credit depends on the hired person’s target group, the wages paid to that person and the number of hours that person worked during the first year of employment. The maximum tax credit that can be earned for each member of a target group is generally $2,400 per adult employee. But the credit can be higher for members of certain target groups, up to as much as $9,600 for certain veterans. Employers aren’t subject to a limit on the number of eligible individuals they can hire. That is, if there are 10 individuals that qualify, the credit can be 10 times the listed amount. Bear in mind that you must obtain certification that an employee is a target group member from the appropriate State Workforce Agency before you can claim the credit. The certification generally must be requested within 28 days after the employee begins work.

New Markets credit

This credit has been extended through 2019. It gives investors who make “qualified equity investments” in certain low-income communities a 39% tax credit over a seven-year period. Certified Community Development Entities (CDEs) determine which projects get funded — often construction or rehabilitation real estate projects in “distressed” communities, using data from the 2006–2010 American Community Survey. Flexible financing is provided to the developers and business owners.

Empowerment Zones

Empowerment Zones are certain urban and rural areas where employers and other taxpayers qualify for special tax incentives, including a 20% credit for “qualified zone wages” up to $15,000, for a maximum credit of $3,000. The tax incentive expired December 31, 2014, but it has been extended through December 31, 2016.

If you have questions about any of these potential deductions, employee benefits incentives or tax credits for the current or coming tax year, talk to the Tax Services Group at Cornwell Jackson. You may also download our newest Tax Planning Guide.

Gary Jackson, CPA, is the lead tax partner at Cornwell Jackson. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing tax advisory services to individuals and business leaders in the Dallas/Fort Worth area and across North Texas. 

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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

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.

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.

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Posted on Nov 28, 2016

advisory services, business tax, business services, tax services, CPA in Dallas

Finding skilled talent is a high priority for almost any industry you read about in the US. Employee benefits like health insurance and paid time off are mainly done to attract and retain the best employees, but there are some tax savings incentives associated with this practice. Consider the following tax savings options through employee benefits:

Qualified deferred compensation plans

These plans include pension, profit-sharing and 401(k) plans, as well as SIMPLEs. You take a tax deduction for your contributions to employees’ accounts. Certain small employers may also be eligible for a credit when setting up a plan.

Retirement plan credit

Small employers (generally those with 100 or fewer employees) that create a new retirement plan may be eligible for a $500 credit per year for three years. The credit is limited to 50% of the first $1,000 in qualified plan startup costs. Employers must file IRS Form 8881 – Credit for Small Employer Pension Plan Startup Costs.

HSAs and FSAs

If your business provides employees with a qualified high deductible health plan (HDHP), you can offer them Health Savings Accounts to contribute dollars pre-tax for certain medical expenses. Regardless of the type of health insurance you provide, you can also offer Flexible Spending Accounts for health care. If you have employees who incur day care expenses, consider offering FSAs for child and dependent care.

Employees can also contribute to an FSA for unreimbursed business expenses such as parking. The money for HSAs and FSAs can be contributed pre-tax, helping employees reduce their taxable income for expenses they would pay for anyway. A certain amount of money from FSAs can be carried forward for non-health care related expenses.  HSAs can be a long-term investment vehicle if employees don’t need to use the funds for medical care.

HRAs

A Health Reimbursement Account reimburses an employee for medical expenses up to a maximum dollar amount. Unlike an HSA, no high deductible health plan (HDHP) is required. Unlike an FSA, any unused portion can be carried forward to the next year. But only the employer can contribute to an HRA. The employer sets the parameters for the HRA, and unused dollars remain with the employer rather than following the employee to new employment. Because the reimbursements occur pre-tax, employees and employers often save up to 50% in combined taxes on the cost of medical expenses.

Small-business health care credit

The maximum credit is 50% of group health coverage premiums paid by the employer, provided it contributes at least 50% of the total premium or of a benchmark premium. For 2016, the full credit is available for employers with 10 or fewer full-time equivalent employees (FTEs) and average annual wages of less than $25,900 per employee. Partial credits are available on a sliding scale to businesses with fewer than 25 FTEs and average annual wages of less than $51,800. To qualify, employers must generally be enrolled online in the Small Business Health Options Program (SHOP). The credit can be taken for only two years, and the years must be consecutive.

Fringe benefits

Some fringe benefits — such as employee discounts, group term-life insurance (up to $50,000 annually per person), parking (up to $255 per month), mass transit / van pooling (also up to $255 per month for 2016, because Congress has made parity permanent) and health insurance — aren’t included in employee income. Yet the employer can still receive a deduction for the portion, if any, of the benefit it pays and typically avoid payroll tax as well.

Play-or-pay penalty risk

Not all employee benefits are created equal in terms of tax advantage. The play-or-pay provision of the Affordable Care Act (ACA) does impose a penalty on “large” employers if just one full-time employee receives a premium tax credit. Premium tax credits are available to employees who enroll in a qualified health plan through a government-run Health Insurance Marketplace (e.g. exchanges) and meet certain income requirements — but only if: they don’t have access to “minimum essential coverage” from their employer, or the employer coverage offered is “unaffordable” or doesn’t provide “minimum value.” The IRS has issued detailed guidance on what these terms mean and how employers can determine whether they’re a “large” employer and, if so, whether they’re offering sufficient coverage to avoid the risk of penalties.

Review your company’s employee benefits with your tax advisor to determine which benefits may provide additional business tax savings. If you are planning to add new benefits, explore the advantages and tax implications first.

Continue Reading: Which tax credits apply to my business in 2016?

If you have questions about any of these potential deductions, employee benefits incentives or tax credits for the current or coming tax year, talk to the Tax Services Group at Cornwell Jackson. You may also download our newest Tax Planning Guide.

Gary Jackson, CPA, is the lead tax partner at Cornwell Jackson. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing tax advisory services to individuals and business leaders in the Dallas/Fort Worth area and across North Texas. 

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Posted on Nov 14, 2016

advisory services, business tax, business services, tax services, CPA in Dallas

Running a profitable business these days isn’t easy. You have to operate efficiently, market aggressively and respond swiftly to competitive and financial challenges. Even when you do all of that, taxes may drag down your bottom line more than they should.

Projecting your business’s income for this year and next can allow you to time income and deductions to your advantage. It’s generally — but not always — better to defer tax, so consider:

Deferring income to next year

If your business uses the cash method of accounting, you can defer billing for products or services at year-end. If you use the accrual method, you can delay shipping products or delivering services.

Accelerating deductible expenses into the current year

If you’re a cash-basis taxpayer, you may pay business expenses by December 31 so you can deduct them this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid. You may also choose to take the opposite approach. If it’s likely you’ll be in a higher tax bracket next year, accelerating income and deferring deductible expenses may save you more tax over the two-year period.

Don’t forget about depreciation of larger assets as a way to reduce taxable income. For assets with a useful life of more than one year, you generally must depreciate the cost over a period of years. In most cases, the Modified Accelerated Cost Recovery System (MACRS) will be preferable to other methods because you’ll get larger deductions in the early years of an asset’s life. But if you made more than 40% of the year’s asset purchases in the last quarter of 2016, you could be subject to the typically less favorable midquarter convention. Careful planning can help you maximize depreciation deductions in 2017. Other depreciation-related breaks and strategies may still be available for 2016:

Section 179 expensing election

This election allows you to deduct (rather than depreciate over a number of years) the cost of purchasing eligible new or used assets, such as equipment and furniture. The expensing limit for 2015 had been $25,000 — and the break was to begin to phase out dollar-for-dollar when total asset acquisitions for the tax year exceeded $200,000 — but Congress revived the 2014 levels of $500,000 and $2 million, respectively, for 2015. These amounts are annually adjusted for inflation, with the election at $2.01 million and  $500,000 for 2016.

The new expensing election permanently includes off-the-shelf computer software as qualified property. Beginning in 2016, it adds air conditioning and heating units to the list. You can claim the election only to offset net income from a “trade or business,” not to reduce it below zero to create a loss.

The break allowing Section 179 expensing for qualified leasehold improvement, restaurant and retail-improvement property has also been made permanent. For 2015, a $250,000 limit applied, but for 2016 the full Sec. 179 expensing limit applies.

50% bonus depreciation

This additional first-year depreciation for qualified assets expired December 31, 2014, but it has now been extended through 2019. However, it will drop to 40% for 2018 and 30% for 2019. Qualified assets include new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property and qualified leasehold improvement property. Beginning in 2016, the qualified improvement property doesn’t have to be leased.

Accelerated depreciation

The break allowing a shortened recovery period of 15 years — rather than 39 years — for qualified leasehold improvement, restaurant and retail-improvement property expired December 31, 2014. However, it has now been made permanent.

Tangible property repairs

A business that has made repairs to tangible property, such as buildings, machinery, equipment and vehicles, can expense those costs and take an immediate deduction. But costs incurred to acquire, produce or improve tangible property must be depreciated. Final IRS regulations released in late 2013 distinguish between repairs and improvements and include safe harbors for qualified businesses and routine maintenance. The final regulations are complex and are still being interpreted, so check with your CPA or tax services advisor on how it may apply to you.

Cost segregation study

If you’ve recently purchased or built a building or are remodeling existing business space, consider a cost segregation study. It identifies property components that can be depreciated much faster, increasing your current deductions. Typical assets that qualify include decorative fixtures, security equipment, parking lots and landscaping.

Hire Your Children

If your children don’t have earned income and you own a business, consider hiring them. As the business owner, you can deduct their pay. Other tax benefits may also apply. The children must be paid in line with what you would pay non-family employees for the same work.

Vehicle-related deductions

Business-related vehicle expenses can be deducted using the mileage-rate method (54 cents per mile driven in 2016) or the actual-cost method (total out-of-pocket expenses for fuel, insurance, repairs and other vehicle expenses, plus depreciation). Purchases of new or used vehicles may be eligible for Sec. 179 expensing. However, many rules and limits apply.

For autos placed in service in 2016, the first-year depreciation limit is $3,160. The amount that may be deducted under the combination of MACRS depreciation and Sec. 179 for the first year is limited under the luxury auto rules to $11,160. In addition, if a vehicle is used for business and personal purposes, the associated expenses, including depreciation, must be allocated between deductible business use and nondeductible personal use.

NOLs

A net operating loss occurs when a C corporation’s operating expenses and other deductions for the year exceed its revenues. Generally, an NOL may be carried back two years to generate a refund. Any loss not absorbed is carried forward up to 20 years to offset income. Carrying back an NOL may provide a needed influx of cash. But you can elect to forgo the carryback if carrying the entire loss forward may be more

beneficial. This might be the case if you expect your income to increase substantially compared to the prior two years…or for tax rates to go up in future years.

Section 199 deduction

The Section 199 deduction, also called the “manufacturers’ deduction” or “domestic production activities deduction,” (DPAD) is 9% of the lesser of qualified production activities income or taxable income. The deduction is also limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts. The deduction is available to traditional manufacturers and to businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing. It isn’t allowed in determining net self-employment earnings and generally can’t reduce net income below zero. But it can be used against the Alternative Minimum Tax calculation.

Not all of these deductions will apply to your particular business, but knowing about them supports better business tax planning in 2017.

Continue Reading: Which employee benefits offer 2016 tax savings?

If you have questions about any of these potential deductions, employee benefits incentives or tax credits for the current or coming tax year, talk to the Tax Services Group at Cornwell Jackson. You may also download our newest Tax Planning Guide.

Gary Jackson, CPA, is the lead tax partner at Cornwell Jackson. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing tax advisory services to individuals and business leaders in the Dallas/Fort Worth area and across North Texas. 

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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.

Continue Reading: Focus on BHPH 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.

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.

 

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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.

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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.

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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.

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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.

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