Why Your Priority List Should Include Clean Accounting Records
Dealers regularly tell new car buyers to have their vehicle checked and serviced regularly. Keeping a vehicle well maintained according to manufacturer suggested guidelines will mitigate the risks of preventable problems. Said another way, a well maintained vehicle will serve you well, hold value and not let you down. Keeping clean accounting records and performing preventive maintenance on your dealership accounting systems will provide the same benefits.
We all know the obvious benefits of maintaining clean accounting records: managing cash flow, collecting receivables timely, computing pay plans correctly at month-end, reporting accurate profits to the manufacturers and aiding your CPA in their year-end tax planning. These tangible benefits are reason enough to invest in the people and systems necessary.
However, in today’s market with explosive M&A activity, competitive financing and more creative fraud than ever before, there are bonus reasons to catch up and clean up. Even if you don’t consider yourself to be an active buyer or seller, your thinking could quickly change if the right opportunity presents itself. Interest rates continue to be at or near all-time lows, and banks and financial institutions are offering the lowest spreads to dealerships they deem to be the most worthy.
How CLEAN Is Clean?
The usual standards for clean accounting records (up to date reconciliations and schedules with the least of amount of exceptions) still apply. Reconcile cash daily. Reconcile vehicle inventories weekly. And reconcile all other key accounts (holdback, finance reserves, parts pad, parts open account, floorplan, etc.) no less than monthly.
That said, new expectations raise the bar on the definition of clean accounting records – some of which go beyond the general ledger and the DMS. For example:
- Have you conducted and documented compliance audits?
- Including proper IT security? (A lapse in this year could outweigh all the benefits discussed in this article.)
- Are you updating depreciation standard entries more than once a year?
- Are all expenses accrued in the correct period?
- Do you limit arbitrary spreading of expenses?
- Are you properly estimating and accounting for reserves for loyalty programs?
- Are you properly securing customer data (both paper and electronic)?
- Are all in force contracts organized and readily accessible?
- Are factory reports regarding facility compliance and operating results organized and readily accessible?
- How closely do your reported results compare to GAAP results?
- Are non-dealership assets excluded from the balance sheet?
- Are off balance sheet assets tracked and quantified as well as potential earnings from same?
The Benefits Outweigh the Cost
Every transaction ends with the data on your dealer statement. Your dealer statement is your opportunity to make a first impression on your prospective partner – be it a potential buyer, a potential new manufacturer or a potential new lender. This is where your creditability begins. At some point in the transaction it is likely the other party will gain access to your 12th statement, your 13th statement, your CPA-prepared financial statement, your tax return and your normalized earnings worksheet. The more the numbers on each of these reports resemble one another, the more credibility you are likely to receive. This is particularly important if the transaction is happening mid-year. Prior year results will determine how much reliance should be placed current year interim reporting. The fewer adjustments made on the 13th, or by the CPA, or for normalization the more credible and reliable your data will be viewed.
In addition, your ability to estimate the true value of your store as well as tax implications will be increased by clean dealer statements. This will make any business valuation more accurate regardless of the purpose of the valuation – negotiating a sale, gift and estate planning purposes, marital reasons, etc.
A Few Other Benefits
It is not uncommon for a dealer to consider selling a store well before he/she discloses the decision to the employees or the factory. The cleaner and more organized the records are, the easier it will be for the dealer and a few key employees or advisors to gather all the needed information for the early stages of due diligence without setting off any alarms.
The cleaner and more organized the records are, the easier it will be for certain types of fraud to be exposed. In many cases, it is not a matter of if fraud will occur, but when. In the unfortunate situation where a fraud may occur, you want to put yourself in a position to identify it is occurring as quickly as possible.
Your internally prepared financial statements need to be as accurate as possible and your controls over key exposure areas as tight as possible, if you are going to minimize financial risk and take full advantage of the opportunities that exist in today’s market.
This article appeared in the Winter 2015 issue of In Gear magazine, an official publication of the Maryland Automobile Dealers Association.