It’s natural for business owners and executives to pay attention to the income statement when it’s issued. In the shadow of COVID-19, income statement figures may seem more essential than ever. However, information on the balance sheet can provide insight into the overall financial picture. Among other things, you can use the balance sheet to determine your store’s return on equity, debt-service and current ratios. It also can help you spot unsubstantiated estimates, underreported expenses and even fraud.
Your balance sheet can be useful when gauging how well your dealership is collecting accounts receivable (AR). When used together with AR aging reports, which list the specific invoices that are overdue, the balance sheet can help you monitor the overall status of your AR. For example, if your monthly sales are considerably higher than your monthly collections, you’re likely not collecting your AR promptly.
Dealerships typically have several different types of AR on their books. These
|Rounded numbers can be a red flagThere are times when dealership owners need to question what they see on the balance sheet. On its year-end statement, fictitious dealership Metro Auto, for example, has an $11,000 line item for “nonautomotive inventory.” It isn’t clear what this item is, and the owner shouldn’t accept round-number account balances without asking for an explanation from the accounting department. Rounded numbers can be a red flag for unsubstantiated estimates, underreported expense or fraud.To help catch errors and possible fraud, your dealership’s balance sheet accounts should be reconciled regularly. As an outside party, your CPA is in a good position to perform this service.|
include service repairs, warranty work, contracts in transit, finance, and manufacturing receivables such as incentives, holdback and rebates.
In general, the timetable for receiving balance sheet reports on your AR status and aging from your controller is 30 days. This schedule works for such items as service repairs, holdback, finance, manufacturing incentives, and rebate receivables (assuming the manufacturer’s terms for rebates are net-30 days). Weekly AR reporting may be more appropriate for warranty work and contracts in transit.
Along with inventory aging reports, the balance sheet also can serve as a valuable inventory management tool. Vehicle inventory is usually the largest asset on a dealership’s balance sheet, so it’s clearly an area that requires extra care. By reviewing your inventory aging reports and balance sheet, you can calculate any impairment losses due to declines in the value of your new and used vehicles. Then you can make decisions about what to do with vehicles that have been on your lot for a long period of time, such as 150 days for new vehicles and 60 days for used vehicles.
For example, since the market for used vehicles can sometimes fluctuate drastically, you might consider reducing the price on the used cars you’ve had for more than 60 days or wholesaling them. Using aging reports for new vehicles, meanwhile, will help evaluate whether you’re carrying too much new inventory and thus paying more in financing costs than you should be.
Evaluating sources and uses of cash
Prepaid expenses are another balance sheet item to watch closely. Dealerships sometimes pay for a year’s worth of radio or TV spots in advance, but is this a good use of cash? You may be better off using the money to cover your store’s immediate operational needs, such as covering payroll, floor plan interest and utilities.
Also keep an eye on “we-owe” items. These are things you’ve been paid for but that haven’t yet been delivered to customers — for instance, new tires, down payment deposits or prepaid service owed to the customer. Do you still have the inventory or cash on hand to deliver these items?
A financial snapshot
A balance sheet gives you a snapshot of your dealership’s financial position at a certain point in time. You can see at a glance your assets and how they’re financed (debt vs. owners’ capital). Analyzing this data can help improve your dealership’s financial performance and its outlook for the future.