Putting the Thaw on Frozen Capital and Improving Dealership Cash Flows
By Jim Eagan
Auto Dealer Alert, 2007 Volume 7

All dealerships experience peaks and valleys in their cash flow needs. Even well-capitalized and highly profitable dealerships can experience tightness in their cash flows. For dealerships that are undercapitalized or losing monies, managing the constant cash shortage can become very stressful, both for dealers and their controllers.

More and more dealerships are confronting serious cash flow challenges due to decreased business volumes and declining profit levels. Another reason why many dealerships, even profitable ones, periodically experience cash flow shortfalls or fail to optimize their cash flow situation is the simple fact they’re inattentive to the causes of frozen capital. Most dealers and their managers tend to spend more time pouring over the income statement components of their departmental operations than they do the balance sheet.

What constitutes frozen capital? Frozen capital consists of those components of your dealership balance sheet that are either excessively consuming cash or represent profits that haven’t turned into cash within a normal turn cycle. Frozen capital would primarily include excessive accounts receivable and inventory, both from an absolute size basis and from an aging basis. It can also include investments and fixed-asset acquisitions that aren’t financed, deposits, non-performing assets, and prepaids. You could also argue that frozen capital could include a human capital element. Although not on the balance sheet, poor-performing or excessive dealership employees are definitely draining dealership cash.

Probably the most critical “best practice” associated with minimizing the level of frozen capital and improving dealership cash flows is by knowing what frozen capital is when you see it and tagging instances of it with a cost of money factor. The pain of seeing these types of scenarios on a regular basis should motivate a change of behavior. Pay plan designs should reward and, if necessary, penalize departmental managers if their departments give rise to excessive frozen capital.

The following questions by category should be helpful in recognizing whether or not your dealership is vulnerable to instances of frozen capital. Hopefully the questions will also get you thinking of other beneficial changes that might be in order for your dealership.

Monitoring Dealership Balance Sheet Schedules

• Are you familiar with what balance sheet schedules are produced each month by the office?
• Do you know whether the schedules are in clean condition?
• What practices are used by the office to result in clean schedules?
• Are profits casually adjusted away for the sake of cleanliness?
• Are specific office personnel assigned responsibility for maintaining specific schedules?
• Are schedules analyzed each month by the office manager?
• Does anyone other than the office manager review these schedules?
• How frequently does top management review the schedules?
• Are adjustments understood by top management?

Maintaining Key Balance Sheet Schedules

Are the following balance sheet accounts set up and scheduled:

• Contracts-in-transit?
  • Is there an easy trace to the deal folder?
  • Are they less than 2–5 days old?
  • Who follows up on slow contracts-in-transit payers?
  • Is deficient paperwork causing slow payers?
• Vehicle receivables?
  • Controlled by VIN number and/or stock number?
  • Limited to dealer trades, outright sales, and deposits?
  • Is credit extended to wholesalers?
• Holdback receivable?
• Employee purchase receivables?
• Manufacturer rebates and incentives?
  • Are you applying for rebates and incentives at the same time that the vehicle sale is recorded? (Sometimes when there’s a peak in volume levels, the individuals recording the sales of vehicles will defer applying for the rebates and incentives until later. This is not a wise practice; in too many cases, this deferral gets extended or forgotten due to other work demands in the office.)
• Floorplan assistance?
• Warranty receivables?
  • How would the dealership fare if the manufacturer decided to conduct an audit?
  • Is reimbursement paperwork submitted on a timely basis?
  • Are the reasons for rejects researched and resubmitted?
• Employee receivables?
  • Who approves employee advances?
  • Do you consider the current financial status of employees in relation to their role in the internal control structure?

Receivables Management and Collection

• Who’s responsible for monitoring accounts receivable?
• Are monthly statements prepared and sent to customers on a timely basis?
• Have procedures for prompt follow-up of overdue accounts been established?
  • A series of collection letters?
  • Telephone and personal visit follow-up?
  • Collection agency?
  • Law firm involvement?
• Are collection efforts documented?
• Does the dealership have a procedure for checks returned from the bank NSF?
• Does the dealership have procedures to secure marginal accounts with short-term notes or other collateral?
• Have you considered using the services of customers with overdue balances and financial difficulties and offsetting their charges against amounts due?

It’s important to be aware what causes frozen capital and how it can affect your dealership. For more information, please contact Jim Eagan at 248.223.3257 or jim.eagan@plantemoran.com.

Next Month: Assessing the Level and Costs of Frozen Capital in Your Receivables