the newsletter for auto dealers by o’connor & drew p.c ...the acv, and why haven’t they...

25 Braintree Hill Office Park • Suite 102 • Braintree, MA 02184 • Tel. 617.471.1120 • Fax 617.472.7560 • www.ocd.com

T h e N e w s l e t t e r f o r A u t o D e a l e r s b y O ’ C o n n o r & D r e w P. C . August, 2012 — Volume 12

DealerDetails

In This IssueNew Warranty Parts Law

Cash is Still KingKey Steps Every Owner Should Take to Stay “In Control”

O’Connor & Drew, P.C.

has been servicing the

dealership industry

for over 50 years.

Our passion for

dealerships is the

hallmark of our

commitment to the

industry. We have built

our firm on the trust

we have earned from

dealerships of all sizes

throughout the country.

25 Braintree Hill Office Park Suite 102Braintree, MA 02184

FIRST CLASS U.S. POSTAGE

PAID Permit No. 54394

Braintree, MA

Monthly

• Reviewthebankstatementseitherathomeorinthe office.Lookateachcheckforthefollowing:

– Isthevendorontheapprovedlist?

– Arethesignaturescorrect?

– Doestheendorsementmakesense?

– Lookforgapsinthechecksequencenumbersor oddchecknumbers.

• Lookatthe10oldestnewvehicles.Determinewho orderedthemandwhyhaven’ttheysold.

• Lookatthe10oldestusedvehicles.Determinewhoset theACV,andwhyhaven’ttheysold.

• Reviewthewarrantyschedule.Meetandreviewthis schedulewiththeofficemanager/controllerandservice managertodiscussaging.Followuptomakesureolder itemsarebeingclearedup.

• Dosomesurprisebincountsinthepartsdepartment. Workwiththepartsmanagerandcomparetotheparts pad.Also,doasurpriseinspectionofthepartstruck.

• Reviewthepartsagingwiththepartsmanager.

• Reviewtheaccountsreceivableschedule.Notethe agingandaskaboutolderaccounts.Followuptobe suretheyarebeingmanagedproperly.Lookforoddly namedoroddlynumberedaccounts(forexample #999999 or XXXXXX)

• Reviewrebatesandincentivesschedules.Notethe agingandinquiretothereasonforolderbalances.

• Lookattheaccountspayableschedule.Reviewthe aging.Beawareoftheactivitygoingthrougheach account.Befamiliarwiththevendorsandhowmuch businessyouaredoingwiththem.

• Lookforfluctuationsinprepaidexpensesandaccrued expensesonthefinancialstatements.Askfordetails whenaccountchanges.

Annually or As Needed

• Approveallpayplansandestablishanovertimepolicy.

• Distributeallpaychecks.

• Developanapprovedvendorlistandoccasionallyrotate thevendors.

Key Steps Every Owner Should Take to Stay “In Control” (cont.)

DealerDetails DealerDetails

Afteralmostthreeyearsofanticipation,thebilltoamendtheChapter93BDealerFranchiseLawswaspassedintheHouseandSenateandsignedintolawbyGovernorPatrick.ThissignifiedabigvictoryfortheMassachusettsautomotivedealers.Oneofthemostsignificantaspectsoftheamendeddealerfranchiselawsisthenewwarrantypartslaw,whichstrengthensthelanguageofthewarrantyreimbursementrequirementsofthemanufacturers.Theoldlawcontainedaretailpartsprovision;however,itprovidedlittledetailastothemethodofcalculationusedtosubstantiateadealer’s“retailrate.”Intheabsenceofadefinedcalculationmethod,severalmanufacturers,(e.g.Ford,GeneralMotors,Chrysler,Kia,etc.)requiredthefranchiseddealerstoadheretotheirNationalWarrantyReimbursementPolicy.Others(e.g.Mercedes-BenzandToyota)simplyrefusedtocomply.Thenewlaweliminatesanyambiguitybyclearlydefiningtherequiredmethodofcalculationinordertodetermineadealer’sretailrate.

Thenewwarrantylawspecificallyrequiresmanufacturerstoadequatelyandfairlycompensatethemotorvehicledealerforlabor,partsandmaterialsfurnishedunderthedealer’svehiclewarrantyobligation.Thelawdefines“fairandadequatecompensation”astherateandpricecustomarilychargedforretailcustomerrepairs.Thelawalsoexplicitlystatesthatadealershallestablishitsretailratebypreparinga100sequentialrepairorderanalysisofcustomerpaidrepairordersthatarenormallyusedinwarrantylikerepairs,andliststhetypesofpartsthatshouldbeexcluded.Thislanguageshouldlimitthemanufacturers’abilitytoavoidcompliance.Itshouldbenotedthatthe100repairorderanalysisoftenrequiresthedealertoaccumulatesubstantiallymorethan100totalrepairordersduetonon-qualifyingrepairorderssuchasmaintenance,internalsandwarranty.Inourexperience,theaveragesubmissionincludes1,000to1,500repairorders.Itisimportanttounderstandthatthemanufacturerswillnotapprovedealersforretailrateswithoutpreparingthe100repairorderanalysis.Simplyquotingthelawandrequestingarateadjustmentwillnotworkwithoutprovidingthesupportinganalysistosubstantiateit.

Mostmanufacturersreimbursedealersforwarrantypartsatarateofcostplus40%.Thisdiffersfromtheaveragedealerwhomarksupretailpartsatcostplus70%to90%.Theimpactthiswillhaveonthedealership’sbottomlinewillvarybasedonthemark-uppercentageofretail

partsandthevolumeofwarrantypartsalesthattheygenerate.Onaverage,thisshouldaddapproximately$50,000to$100,000ofgrossprofitannuallyperdealership–sometimesmore.

ItisimportanttounderstandthattheManufacturer’sSuggestedRetailPrice(“MSRP”)isnotreallyretail.Somemanufacturers(e.g.Nissan,Toyota,Volkswagen,Audi,etc.)reimbursetheirdealers’MSRPonwarrantyparts.DealersoftenchargetheircustomersratesthatarewellaboveMSRP.Dealersshouldcalculatethedifferencebetweenthetworatesandtheexpectedimpactanincreasetoretailwouldhaveonitsbottomline.Remember,MSRPissimplyaratecontrolledbythemanufacturer.

Overthepastcoupleyears,wehaveassistednumerousMassachusettsautodealersinobtainingretailratereimbursementforwarrantypartsundertheoldlaw.ThisincludesbutisnotlimitedtoHonda,Acura,GeneralMotors,Subaru,Nissan,Hyundai,BMW,Volvo,Mazda,andAudi.Becauseofourextensiveexperienceonthisissue,wehaveasolidunderstandingoftheprocessandthepartsthateachmanufacturerwillacceptasqualifying.

Wehaveyettoseeanyrepercussionsonanyoftheapproveddealers,whichisacommonfearamongstdealers.Therefore,itbehoovesdealerstosubmitforarateincreaseassoonaspossibleinordertostartcapitalizingontheadditionalrevenue.

New Warranty Parts Law

If you would like any additional information, please call Frank O’Brien, CPA, CIA, CFE at (617) 471-1120.

Cash is Still KingQuestion: When can turning a profit be bad? Answer: When you have no cash to show for it.

• Signallcheckstotheextentpossible.Insistthatall documentationbeattachedtothechecks.Nochecks shouldbemadepayabletocashandnoblankchecks.

• Beinvolvedinthevehicleorderingprocess.

• ReviewACV’sbeingputtotrades.

• ReviewtheDOC.

Weekly

• Controlthewholesaleprocess.

• Gototheusedvehicleauction.

• Reviewallgeneraljournalentriesbeingmadebyoffice manager/controller.

Cont. >

Key Steps Every Owner Should Take to Stay “In Control”

Ifnotforacalculatedinvestment,propercashmanagementiscriticaltoensuringeverydollarearnedendsupinthecheckbook.Howcanthishappenwhenitdoesnot?Coulditbethatunfinancedinventoryisoutofcontrol?Arefactoryandcustomerreceivablesaged?Issomeoneatthedealershipcommittingfraud?ADealer’scashmanagementprocessshouldstartwithproperinternalcontrols.

Let’sstartwiththecheckbook.Ataminimum,dealersshouldhavethecompanybankstatementssentdirectlytotheirhomes.Openthemandreviewthecontents.Ifyouarenolongerreceivingbankstatementsandaredoingeverythingonlinethedealershouldhaveonlineaccessandshouldregularlyreviewtheactivity.Bankreconciliationsshouldbecompletedandreviewedmonthly.Periodicallyreviewmonthlypayrollregisterstoensurepayisinlinewithpayplans.Makesurecontractsarefundedtimely.Whatareyourprocedurestoensurecontractpaperworkisperfect?Withelectronictransactions–mostcontractsshouldbefundedinlessthan5days.Reviewcontractsintransitandvehiclereceivableswithmanagers–holdthemaccountablefor

contractsandvehiclereceivablesthatareaged.Ageditemsshouldimpactmanagerpayplans.

Mismanagedinventorycanbecomealargedrainoncash.Propercontrolsmitigatetheriskofinventorygettingoutofhandorwalkingoutthebackdoor.Vehiclecountsandpartsbinchecksshouldbedoneeverymonthbyanindividualnotinthatrespectivedepartment.Physicallycountingtheinventoryisagoodstarthoweverthecountsmustbereconciledtotheaccountingrecords.Aretherepoliciesandproceduresinplacetowatchnewandusedvehicleinventoryturns?Incentivizingolderunits,

wholesalingtheunitsorsendingthemtotheauctionafteraspecifiedpointintimecanhelprectifythesituationhoweverdealersneedtounderstandwhatcausedtheproblem.Whatareyourpoliciesandproceduresonpartsinventory?Properpoliciesandprocedureswillfocusonkeepingitlean.Watchspecialorderpartstoensuretheyarebilledoutcorrectly.Whoismonitoringobsolescenceandreturningunusedpartstothefactory?Considerreflectinginventoryagingandorcostperunitmetricsintomanagerpayplans.

Collectwhatyouareowed.Whoismonitoringtheagingofcustomerandfactoryreceivables?Holdmanagersaccountablethroughpayplanadjustmentsforageditems.Factoriesareverystringentwhenitcomestopayingonfactoryreceivables.Howdoyouknowthatfactoryreceivablepaperworkisimpeccable?Howdoyouknowthateveryavailableprogramhasbeenappliedfor?Whoisadjustingreceivablesoffthebookswhentheyarenotdeemedcollectible?Doyouknowaboutthem?

Ifyouneedhelpunderstandingwhyyourprofitsarenotinyourcheckbookspleasegiveusacall.