When we begin working with a new dealership client and review their accounting records, we often uncover items that expose the dealership to unnecessary financial risk — what many owners refer to as “skeletons in the closet” More often than not, the dealer principal, general manager and department managers are surprised by what we find.

Why Does This Happen?

In our experience, the most common cause is a lack of communication between the accounting department, department managers and ownership. Closely tied to this communication gap is a lack of accountability.

We’ve heard the same explanations time and again. Accounting says they have already informed department managers of the issues and believe it is management’s responsibility to resolve them. Department managers, on the other hand, claim they were never made aware of the problems, believe Accounting should be responsible for collecting outstanding receivables, or assume the accounting records must contain errors.

Does this sound familiar? If so, it may be time to review your dealership’s policies, procedures and communication practices.

The good news is that we’ve seen many dealerships successfully turn things around. These organizations now maintain minimal balances in past-due accounts receivable, outstanding rebate claims, aged contracts in transit and vehicle receivables.

So What Changed?

Successful dealerships establish regular management meetings — weekly in most cases, and daily when necessary — with a structured agenda. They hold Accounting accountable for posting transactions accurately and on time, while department managers are responsible for following best practices within their respective departments. These meetings allow the dealer principal or general manager to quickly identify communication breakdowns, clarify responsibilities and ensure issues are addressed before they become costly problems.

Each department should maintain a list of key performance indicators and financial risk items — or “hot topics” — to review during every meeting. The following are some of our recommendations:

Sales & Finance (F&I)

• • Contracts in transit aged more than 10 days
  • Uncollected customer down payments
  • Past-due vehicle notes receivable
  • Incentive and rebate claims aged more than 30 days
  • Outstanding contract stipulations for subprime or special finance deals
  • Overaged new and used vehicle inventory
  • F&I product penetration, including service contracts and other protection products

Service

• • Customer receivables aged more than 30 days
  • Warranty claims aged more than 30 days
  • Accounts receivable extended beyond established credit guidelines
  • Open repair orders outstanding for more than seven days. We frequently find repair orders left open for employees, friends or family members to avoid showing unpaid repair work in accounts receivable.
  • Hours per customer-pay repair order and effective labor rate

Parts

• • Open parts tickets more than seven days old
  • Customer-pay special-order parts (including required deposits or prepayments)
  • Inventory with no sales activity for 12 months or longer
  • Manager review of DMS-generated stock orders
  • Phase-in and phase-out inventory criteria
  • Parts returns processed within factory-protected guidelines
  • Wholesale customer receivables aged more than 30 days

Accounting

• • Monthly reconciliation of all bank accounts, finance reserve accounts and floorplan accounts
  • Timely reporting to department managers on past-due balances, missing documentation and other outstanding issues
  • Monthly reconciliation of parts inventory in the DMS to the general ledger

Few employees enjoy bringing problems to ownership’s attention. However, avoiding difficult conversations only allows small issues to become significant financial risks.

By regularly reviewing the key metrics and risk areas that affect your dealership, management can identify the root causes of problems, improve communication, reinforce accountability, and adjust policies and procedures before issues impact profitability.

The most successful dealerships aren’t those that never encounter problems. They’re the ones that identify them early, assign clear ownership and take action before those problems become expensive surprises.