Jeff Sacks, with whom I conduct our general managers' “Boot Camp” training, tells of a 20 Group session he spoke at.
When he entered the meeting for his presentation, he noted an anchor sitting in front of one participant and an ice chest in front of another. He asked the chairperson why.
“Oh, the one with the ice chest is the member with the most frozen capital, and the anchor in front of the other fellow represents the member with the most out-of-line expense structure.”
The only way they for them to rid themselves of those burdens was to make sufficient improvements in their operations so they're no longer the “highest ranking member” in those categories.
After hearing that, I began to think of the causes of these conditions.
Many years ago I had a call from a dealer friend noting that he was making adequate profits in his operation, but he was constantly fighting a cash shortage. It didn't take long into our conversation to discover why this was the case. I must admit there was a time in my career when I thought profits and cash were synonymous.
I know that profits facilitate the other, but you can be profitable and still be lacking in cash. The key to eliminating frozen capital is sound asset management.
Most of you have your managers participate in monthly sales, expense, profit and loss forecast.
But how many of you involve your managers in the cash management process, i.e. forecasting cash? Sure you have strong asset management guidelines in place in your operation, but do the managers understand why?
Do they totally understand why you insist that they control their inventory levels, their contracts in transit and their accounts receivables? Obviously, if they have an understanding of this critical part of the business, they can become more effective cash managers.
Speaking of cash and frozen capital, let's take a look at accounts receivable, a potential “cash eater” and a typical dealership collection process.
Please follow along with this scenario:
In my dealership, we “cut off” receivables on the 25th of the month, normally late morning or early afternoon. We process the statements and mail them around 27th.
Now, follow the customer scenario: I come into the dealership on July 25th around 3 p.m. and pick up my large wholesale parts order for my body shop operation. Obviously, since I am an independent operation, cash flow is very important to me.
I know the dealership will send me a statement around the 27th of August and it will be due by September 24th if I don't want to be shown as past due on the dealership's accounts receivable schedule.
What's the difference in these two scenarios? According to the dealership's schedule, the customer's account status is current, but in reality, using this example, the customer has 61 days from the acquisition of the parts until payment is due. This is a prime example of frozen capital and it is happening every day in our industry. Sure, the ice chest example is amusing, but not if you are strapped for cash.
As far as the anchor, many times in this forum suggestions have been made that will help you there. As a reminder, along with your management team, take a look at each individual expense within each category and identify any or all non-essential expenses, including non-essential personnel.
Then take action. Expense management is not rocket science but an ongoing effort of monitoring and then acting when an out-of-line situation appears. Remember, if you want a 30% net to gross dealership, you must also have a 70% expense budget, no more.
As we approach the end of the year and the winter selling season, you might keep the ice chest and anchor in mind when reviewing your operation.
Tony Noland is director of international operations for NCM Associates. He has 30 years of automotive retail experience.
For information to obtain a complete analysis of your financial operation in comparison with Best Practices benchmarks, fax a written request to (913) 649-7429.