By Luis Deville, CPA
Like many industries, dealerships mainly focus on revenue and ensuring that sales increase at a steady pace. However, the collection of receivables from these sales often do not receive the same level of focus. This can cause dealerships to potentially incur avoidable and unnecessary write offs associated with products that they sold.
We see this situation more often with relatively small receivables on a per transaction basis, such as warranties related to vehicle repairs, factory incentives and factory rebates, to name a few. These types of receivables can be complex in their collection process and accordingly, may seem cumbersome to deal with after the transaction is complete and the revenue has been recognized. As such, busy managers or accounting staff may opt to let the balance linger on the books or simply write off the balance rather than continue collection efforts.
Factory and extended warranty receivables, for example, require dealerships to follow and comply with certain procedures to receive these outstanding balances. Some of these parameters are time sensitive, which is why it is important to stay on top of these receivables to make sure your dealership does not lose out on the money it has earned. The same goes for incentives from manufacturers. These can involve income from both vehicle sales and fixed ops that require the dealer to provide certain documentation to receive these funds. Receivables can also be found in payable accounts in the form of credits issued by the vendor or potential overpayments. These overpayments and credits are receivables that the vendor owes your dealership and should be monitored.
Small Receivables, Big Potential Impact
It is easy to overlook smaller receivables, especially when your dealership is making great profits. However, receivables, no matter how small, are still cash that the dealership has earned through sales and should be collected. One perspective to consider, when evaluating the time to invest in monitoring of receivables schedules and collection is if your dealership is generating a 4% return on sales, the write off of a $2,500 receivable roughly the equivalent of losing a $62,500 sale. These small balances might not appear to materially affect your cash balance while your dealership is making a good profit, but if the industry takes a downturn, every bit of effort and best practices implemented towards receivables collection processes will put you at an advantage when time comes to make strategic cash management decisions.
Ways to Prevent Write Offs
Create A Review Process
Perform reviews of receivable accounts with the responsible department manager and the dealership controller at least monthly. Schedule the review process on a calendar as a recurring meeting and require specific explanation by the responsible manager of the current status of aged balances, the last person who was contacted, the last action taken and next steps. The record of updates can be retained within the DMS if there are comments fields, or in a DMS data aggregator or shared schedules in Excel where individuals can provide real time updates. It is also important to run reports for open repair orders and open parts invoices to review aging invoices that have been completed but have not closed for collection.
Hire a Consultant
If your accounting staff lacks the bandwidth to conduct these extensive reviews, then it is a good idea to hire an outside source to point out receivables and other balances on the books that are a growing concern and could possibly be written off if no action is taken.
Engage a Third-party Warranty Collection Company
These types of collection companies charge a fee but often their expertise, paired with a dedicated focus on collections, provides a better return on investment than an in-house warranty administrator who may be less experienced. We have seen many dealers write off six figures of warranty receivables due to lack of experience, training, and oversight and mostly because they simply were not monitoring the collections process.
Be Sure to Claim Money That’s Rightfully Yours!
Revenues look good on your financial statements, but cash inflow looks even better in your bank. Make sure you’re collecting all the cash that your dealership has earned.
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