Purchase Orders Protect Auto Dealership Profits

According to J.D. Power, 2022 is likely to be the most profitable year automotive dealerships have ever recorded. There is a lot of pent-up demand, so dealerships can set – and get – higher prices. It’s a year they can sell on gross profit, rather than on volume.

Which makes it a perfect year for them to adopt a purchase order system.

Wait, what?

I know, asking people to do purchase orders is an extra step that’s “not worth the effort.” I grew up in dealerships and have been a purchase order advocate since my first stint in the back office of my father’s dealership. I’m familiar with that argument.

Hear Me Out

We all know dealerships need to digitize their processes, and a purchase order process ties into other digital systems, such as your DMS, procurement system and payment automation system to help you achieve paperless processing.

But why now? Why not just make hay while the sun shines and save back-office cost-cutting measures for leaner years?

Obviously record profit years don’t come around very often. It’s prudent to take some of that profit and reinvest it in protecting current and future profits. Because that’s what POs are: an investment in protecting profits.

Why Purchase Orders?

What many  don’t realize is a purchase order is a legally binding contract between buyer and vendor.

When you agree to buy anything from a vendor, from a car to an air filter, you agree to a certain price and certain terms, both of which affect your profit on resale. That kind of binding agreement is pretty important right now with all the instability in the supply chain. If you don’t have it, it’s pretty much a free-for-all.

Terms also affect your cash flow. If you say to the vendor, “We’ll buy the air filter for $225, but we’re not going to pay you for 45 days,” and you memorialize that in a PO, then everyone’s expectation has been set and you can manage your cash flow more effectively.

Purchase Orders Help Reduce Both External and Internal Fraud Risk

Accounts payable teams need to be on high alert for fraudulent invoices from cybercriminals who’ve collected data that allows them to run some pretty convincing scams.

A purchase order number on a vendor invoice is a good indication the purchase was indeed authorized, and the invoice is legitimate. It’s easy to confirm  by matching the two up in your PO system. And if there are any questions, there’s an electronic audit trail that makes it easy to see who placed the order.

Then there’s internal fraud – people setting up fictitious vendors, invoicing the dealership and then making the payments to their own bank accounts or those of a friend or family member.

That’s always a risk when you have people involved in the payment process who are struggling financially. The risk is perhaps a little higher in 2022 because when people are aware  dealers are having record high profits, they want to participate in those profits, one way or another.

What’s Holding Dealerships Back?

In my experience, organizations don’t implement a purchase order system for two reasons.

First, there’s the idea that purchase orders take more time. Dealership back offices tend to be short-staffed and the current labor shortage isn’t helping. Anything that sounds like more work for people that are already wearing many hats is a non-starter. 

If you’ve got people walking around the dealership, looking for people to sign checks and approve invoices, having someone do a purchase order isn’t really taking up any more time than you’re already spending.

Then there’s the persistent belief that requiring live signatures on every check is an effective way to control expenses and prevent fraud. It isn’t. For one thing, it’s a rare dealership that is using only checks. Most dealerships make some card and ACH payments and those don’t require signatures. In my experience, there are many expenses being paid by an automated system, which makes automatic deductions from your checking account or paid as a recurring payment on a corporate credit card.

Kyle Rauzi Headshot (002)

An automated PO system is necessary to move to a more modern way of doing business. Combine that with a payment automation system, and you can complete the whole PO-to-pay process in about a quarter of the time that it’s taking now, and with greater security and control.

With a robust PO system in place, you’ll protect your profits in this record year, and beyond.

Kyle Rauzi (pictured, above left) is director of automotive sales at Corpay, a FLEETCOR company and global leader in business payments.