Automotive Updates

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By Marilou C. Vroman, CPA, CFE

Dealers tend to look at high level indicators of store performance. The questions often heard at month end are: “How many cars did we deliver?” or “Where is fixed gross going to end up?” At times, more specific questions should also be asked such as: “Is our service department operating at its full potential?”

While there are many variables that work together to generate service profits such as technician efficiency, productivity and parts availability, a closer look at facility utilization may reveal great opportunities.

The dealership has a maximum realizable service capacity which should be compared to actual labor sales monthly. This maximum capacity is referred to as “facility potential”. Facility potential is calculated via the following formula: Number of bays multiplied by the number of days in the period multiplied by 24 hours multiplied by the dealership’s effective labor rate.

This calculation assumes that the service department is [...]

By Mercedes Hendricks, CPA

Why are we talking about petty cash?  It’s petty!  … Or is it?  We have seen several cases at dealerships recently where abuse of petty cash has led to tens of thousands of dollars in losses.  It is a testament to how often the petty cash may be overlooked at a dealership and where key controls to mitigate losses may be missing.

Petty cash at dealerships often have balances that range from $500 to $3,000 to cover immediate cash needs, such as spiffs and deliveries, without having to wait for accounting to issue checks.  While a common practice, this comes with the risk that cash could be misappropriated.  What is the best way to prevent this from happening?  Segregation of duties.

Access to the petty cash box should be limited to select individuals that do not also have access to accounting functions in the DMS, such as journal entries, or cash [...]

By Mike Frakes

Early in my career when I was a Controller, I was surprised by those two “extra” payrolls that occur every year. The dealership was on bi-weekly payroll and I was not accruing for the two times a year that there were three payrolls in a month. This resulted in two massive expense spikes. Nothing will take the wind out of a General Manager’s sails quicker than him or her thinking a certain amount of net profit has been generated based on average expenses only to find out that it was a three-payroll month.

I began accruing for the additional two payrolls in my second year as a Controller and continued to do so year after year. The calculation was simple. I took the last payroll of the year, added 10% and annualized it to get my monthly accrual amount. For example, if the final payroll was $100,000 for non-commissioned employees (including payroll [...]

By Dan Flugrath, CPA, CFP

Volkswagen Group of America reached an agreement with VW – Branded Dealers with a class action settlement on October 18, 2016. The Federal Court will hold a fairness hearing on January 18, 2017 at 8:00 A.M. to make a determination as to whether or not the initial court-approved dealer class action notice is fair and to decide whether to approve the settlement.

As a result, Volkswagen dealers are facing two financial matters stemming from the actions of the manufacturer. Those two financial matters are classifying the settlement proceeds as lost profits or as reduced value of their Blue Sky or Goodwill. The allocation of the compensation between these two distinct items will have a significant tax difference. The difference arises due to the Blue Sky being a capital asset which is taxed at capital gains rates vs. lost profits being taxed at higher regular income tax rates.

Each individual VW [...]

By Jorge Arrieta

In the automotive industry, we tend to see employees performing tasks in a certain way because traditionally “it has always been done that way,” yet often no one questions why?

The New Year is a great opportunity to review and improve on our operational procedures.  The parts department is a perfect example of old habits that die hard.  For example, for dealers using CDK, the use of the “display/sell” or “DS” function can be used to adjust parts inventory. This function can be appealing due to the convenience it provides however, when the display/sell function is used, the parts pad can be modified without management authorization or a paper trail. In addition, the accounting records may adversely be affected because accounting personnel may not be notified of the adjustment, or have visibility to test if the transaction should be recorded in the general ledger.    One of the largest concerns is the risk [...]

By Mercedes Hendricks, CPA

It is a common misconception that when your dealership is audited or reviewed by an external CPA firm that they would be able to detect fraud.  An audit or a review is designed to ensure annual financial statements are fairly stated and presented in accordance with the reporting framework selected.  While extensive procedures are performed, particularly in an audit where the CPA is required to understand and test internal controls throughout the year, these services are not, in fact, designed to detect fraud.

According to the ACFE Report to the Nations on Occupational Fraud and Abuse in the 2016 Global Fraud Study, 39.1% of all fraud cases included in the study were discovered through a tip.  An external financial statement audit was much further down the list with only 3.8% of the fraud cases uncovered with this method.

Tips are more likely to be submitted by establishing a fraud tip hotline [...]

By Phil Villegas

One of the beautiful things about the New Year is that we take it as an opportunity to reset certain aspects of our lives and make a concerted attempt to do better in the year to come.  Whether it’s a commitment to losing weight, quiting smoking, volunteering time, pursue another degree or simply to take that dream vacation, New Year’s resolutions give us a clear starting point from which to embark on enriching our lives.

This should be no different for your dealership and there’s no better time like the New Year to implement or roll out efforts to improve your store. Just like in our individual lives, the prospect and possibilities of the New Year are endless and this is no different for a dealership.  Just like there is not a perfect person, there is not a perfect dealership, there is always room for improvement. Some New Year’s resolutions for your [...]

By Mike Frakes

During my 13 years as a Controller, I would try to begin as many year-end tasks as possible during December.  A little bit of preparation in December always saved me a lot of time and headaches in January.  Hopefully the checklist below will save you time and frustration as well:

  • Review the balance of every Balance Sheet account thoroughly.
  • Review all bank account and floor plan reconciliations for reconciling items.
  • Review the vendor list for 1099 compliance.
  • Perform the year end physical inventory of units on December 31st.
  • Review depreciation accruals for accuracy.
  • Ensure there are no prepaid expenses with useful lives that do not extend past year end.
  • Verify that your reported payroll taxes are accurate. By doing so, you can make sure to minimize any penalties for underpayment, or take credit for any overpayments.
  • Verify that the estimated payments for state and federal income taxes are adequate, and make [...]

By Marilou C. Vroman, CPA, CFE

Most dealers are aware of the requirements to file IRS Form 8300 when they receive more than $10,000 in cash for business transactions.  Interestingly, as part of our internal audits we test 8300 compliance and still find even the best run dealerships have 8300 Forms which were either filed late, or not at all.

As a refresher, dealers must report cash payments over $10,000 to the Internal Revenue Service using the Form 8300 within 15 days of the related transaction.  The form must be filed regardless of the nature of the transaction or whether the sale has been completed.  In addition to filing Form 8300 with the IRS, dealers need to furnish to each person whose name has been reported on Form 8300 a written statement of the 8300 filing by January 31 of the year following the transaction.

Failure to file a [...]

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