By now, many of you have verified your dealership’s profitability for 2011.  As most dealers, general managers and controllers understand, until we perform a final year-end reconciliation of each asset and liability account, the YTD profitability displayed on our income statement remains an unproven number.  For some of you, this verification process will result in an upward adjustment to your 2011 profitability. However, experience tells me that most dealers will be surprised by a significant downward adjustment. Why does this seem to be a regularly-occurring phenomenon when it doesn’t need to be?

Because of Wall Street’s reporting requirements, the public dealership companies do a pretty good job of reconciling their asset and liability accounts on a monthly basis. Therefore, the earnings they report on a monthly and YTD basis are reasonably accurate, and year-end adjustments are minimal. How do they accomplish this, and why do so few private capital dealers practice the required disciplines of regular balance sheet management?

Although some profitability adjustments are the result of understating or overstating the dealership liability accounts, most of these adjustments are related to the inaccurate valuation of dealership asset accounts.  One of the public companies, with which I have worked extensively, conducts Weekly Asset Meetings. This practice requires all department managers attend a regularly-scheduled, one-hour meeting facilitated by the dealership GM or controller, at which the primary focus is sound asset management.  All inventory and receivables categories are analyzed and discussed, with the participants being required to answer the following questions about the assets for which they are individually accountable:

1. Is the asset real? Can we touch it or otherwise verify its true existence? Any non-existent asset must be quantified.

2. Do we have too much or too little of this asset category, based on the best practices guideline for days’ supply? Any excess or deficiency must be quantified.

3. Is any part of this asset category over-age, based on the best practices guideline?  Any over-age assets must be quantified.

4. What actions will you (the department manager) take to correct any out-of-line conditions identified in questions #1, #2 and #3? What are the results of the actions you committed to during previous Weekly Asset Meetings?

5. How much income must be reserved to offset the asset discrepancies noted in questions #1, #2 and #3?

At month-end, any necessary reserves are recorded, and any changes to these reserve accounts either positively or negatively impact the department managers’ monthly compensation. Does this weekly meeting process create better asset managers? Better asset management disciplines? Better dealership profitability? More accurate monthly reporting?  Absolutely!

Why don’t most dealerships do a better job focusing on asset management? Primarily, it’s an educational issue. Most dealers and general managers have never been properly trained to truly understand their balance sheet or its importance. When I first began my consulting career, I was shocked at what I discovered when I saw the dealer’s or GM’s copy of the balance sheet—they were using it as a “protective cover sheet” to the income statement. It was disfigured by coffee stains, drink rings, smudges, miscellaneous notes, etc.  I soon learned that those dealers were not exceptions to the rule; they demonstrated the current industry rule!

The second reason dealers pay little attention to their balance sheet is because it’s no fun.  Reviewing and managing the income statement (sales, gross profit and expense) is fun, but most senior managers perceive the review and management of assets and liabilities as a pain. However, some dealers and GMs (particularly those with experience working for “the publics”) have learned that regular balance sheet management can become a pleasurable and rewarding process.   

Need help with your asset and liability management skills?  Reach out to your NCM 20 Group moderator or Retail Operations Consulting coach, or sign up for the NCM Institute's Principles of Financial Statement Analysis course.  Keep coming back to www.dealerElite.net