Dealer principals are rarely accountants and rely on their office managers to ensure that accounting is correct and financial statements are accurate and timely. But dealers need to be on the lookout for signs of poor accounting. Here are 10 situations that should set off alarms.
Financial statements are completed late
If you’re not getting monthly statements by the fifth business day after the month’s end, then the accounting department isn’t closing on a timely basis. That’s the general manager’s or owner’s fault. Insist that dealership activities for each month end on the last day of the month, and that statements are available by the fifth working day after the month’s end. Financial results and analysis tend to get stale if not available in a timely fashion, giving managers and owners an excuse to delay taking corrective action – “It’s almost another month’s end. Let’s look at next month’s statements.”
Bank account reconciliations aren’t ready by the fifth business day after month-end
Your accounting department should access online banking information several times a week and reconcile the accounts either every few days or weekly, not monthly. Principals should insist on having bank reconciliations either electronically or on paper by the fifth working day after month-end. This ensures a timely close and lets the principal review the reconciliation and ensure there are no unexplainable “adjusting entries.” Don’t be afraid to ask what any entry is for.
The statement is never right
If the office manager has to explain each month that the revenues or expenses in the financial statement aren’t correct because they actually apply to another month, you’re probably on a cash basis of accounting and not the accrual basis. These methods differ only in the timing of when transactions are recorded in the accounting system.
With cash basis, revenue is recorded when the funds are deposited in the bank, and expenses are recorded when the checks are written. Under the accrual method, revenue is accounted for when earned – such as units delivered – regardless of when the money for these activities is actually received or paid. The accrual method provides for matching revenue with expenses and reflects a more accurate picture of your profit in any given accounting period, month, or year. Get your numbers correct by using the accrual method of accounting.
The prior month’s employee bonuses are expensed in the month paid
One final step in closing the month is calculating employee bonuses that are based on monthly results. Rewarding employees based on their department’s activities will motivate them to improve their department’s results. However, these expenses should be calculated and accrued in the same accounting month that the bonus is based on. Otherwise, a major expense is based on the cash method instead of the accrual method. Make sure bonuses are expensed in the correct month so expenses are matched with revenues.
The month-end is not the last day of the month
Managers often claim they need to keep the books open for a few more days after the calendar month ends to pressure the sales team to deliver units. Once this practice starts, it becomes ingrained and happens each and every month. Having a final date for your sales teams to get units delivered is motivational, but use the last day of the month – that way, business doesn’t get shifted from one month to another. The month ends when the month ends! Ask the office and sales managers when your month really ends for deliveries. Once everyone knows that the rule will now be the last day of the month, the pressure will be on just the same as extending the month, and the accounting will be correct.
The work-in-process (WIP) balance is large and dated
Techs get paid every payday, regardless of when the customer pays for the work. Until the work order is closed, the tech labor on that repair order is collected in an account called work-in-process or WIP. The parts associated with his work may also be included in WIP, although parts values on open work orders usually remain in the parts inventory until the work order is closed.
If the open work order is for a customer-pay unit that’s not on your lot, you will probably not get paid. If it’s for a delivered unit on an internal work order, the WIP will be charged to cost-of-sales when the work order is closed, but it’s usually after month end. The salespeople and management have received commissions or bonuses based on incorrect gross profit, resulting in an overpayment.
Even worse, if the commission or bonus is recalculated and the adjustment is made to the next check, employees will get upset and productivity will drop. WIP needs to be reviewed daily or weekly, not just at month-end. You have poor accounting controls if someone isn’t controlling WIP.
New unit sales accounts aren’t summarized by class, brand, or manufacturer
The sales manager needs an analysis of year-to-date unit sales to determine the best-sellers. The monthly financial operating statement should summarize unit sales by class, brand, manufacturer, or model.
The DMS operating statement does a good job of analyzing unit sales on the departmental sales gross profit analysis page, the revenue and gross profit page, and the inventory analysis pages, but only if the sales accounts are set up by your accounting staff for this kind of detailed accounting. The sales and cost-of-sales accounts have to be reviewed at year-end. Accounts for discontinued products should be eliminated from the DMS and new sales accounts added to the DMS.
If the “new-other” sales account on your DMS has a lot of sales recorded, the office manager hasn’t kept up with changing sales accounts. Review your DMS – make every line on the revenue, gross profit, and inventory pages a meaningful management tool.
Vendors are always calling the accounting department
Vendors and suppliers rarely call unless your dealership has past-due unpaid invoices, or they’ve received a check without an explanation of what the payment is for. Ask the office manager or employee responsible for accounts payable for vendor statements and the reconciliation to the continued accounts payable account.
Poor accounting can result in past-due invoices and slow payments to vendors and suppliers, leading to poor credit ratings for the dealership. Creditors may question your financial stability and stop shipping parts or providing services. Pauses in the work flow lower productivity, especially in the parts and service departments. These departments are difficult enough to manage without vendor and supplier problems.
Thirteenth-month adjustments are usually monthly expenses, not year-end expenses
Nothing is worse than a thirteenth-month statement with a significantly lower net income than the preliminary year-end statement, especially to creditors who received quarterly financial statements in which expenses or cost-of-sales aren’t properly reflected.
The explanation for a loss in the fourth quarter is often “thirteenth-month adjustments.” Year-end adjustments that increase expenses or cost-of-sales usually result from not accruing all expenses monthly or not reflecting the market value of your inventories before year-end adjustments. The value of used inventory or obsolete parts doesn’t change on the last day of the accounting year; it changes throughout the year.
Follow established accounting principles for valuing inventories for all statements sent to your creditors. Monthly accruing of non-cash expenses such as depreciation and amortization will greatly improve the accuracy of the financial statements. If your office manager is waiting for the 13th statement to make these adjustments, the interim statements aren’t accurate.
Monthly operating results aren’t reviewed with the management team
The office manager should insist on monthly reviews of operating results with the management team. At a minimum, the office manager and general manager should share detailed revenue results for each department with the respective manager during a monthly meeting.
The more you involve the management team in their departments’ performance, the more they’ll control expenses and the better they’ll understand their departments’ contribution to dealership profitability. The managers’ buy-in will improve your bottom line.
This article originally appeared in an earlier version in RV Executive Today.