Have you ever calculated your day's supply of contracts in transit (CIT)? Or more important-do you know how to calculate the number? You would be surprised as to how much frozen capital you can have in this one account.
A very high volume metro dealership, part of a large dealer group, had a schedule of CIT approaching seven figures. The majority of contracts were well beyond seven days old, with some over 45 days old. It was discovered that the dealer's F&I department had a procedure whereby once a vehicle was "spot" delivered, the deal was then passed on to the accounting department to handle the billing and payoff. After accounting posted the deal, the unit was paid off, and the sales information was then added to the DOC. With an unaccountable general manager and his weak procedures, and the comptroller's lack of authority to unwind a deal, the cash balance diminished rapidly. To make matters worse, more than 25 of the deals had not been approved by any lender. Everyone had been paid except the dealer. With Contracts-In-Transit Frozen Capital, do not think that volume sales will cure everything. The dealer must supervise his managers more closely and let everyone know "I CARE and I want to know where we are."
How to MEASURE your Contracts-in-Transit
Start off by calculating last month's total dollar retail sales of new cars and new trucks. Add the sales numbers together and divide the total by the number of business days you were open. The answer will provide you with the average day's retail sales.
Next, on your financial statement, find the value of the new contracts in transit. Divide the contracts in transit number by the average day's sales to obtain the Contracts-In-Transit day's supply. The accepted CIT standard is three day's supply.
If the dealership combines new and used CIT receivables in one account, then you must add all retail dollar sales together for new cars retail, new trucks retail, used cars retail and used trucks retail (no wholesale numbers please) and divide this sum by the number of days open for business to arrive at a one day supply. Then find the contracts in transit number and divide it by the average combined sales-new and used daily retail sales number.
Again, this will give you the number of days' supply of Contracts-In-Transit in your dealership. Remember, we are looking for no more than three day's supply.
How to MODIFY your Contracts-In-Transit
For any day's supply number more than three, the dealer needs to look into the internal paper flow between the sales departments and the F&I office, because someone is not processing documents promptly. Another way of saying this, is that the F&I office, along with the sales department, is probably "dumping" on the accounting office.
This CIT account should grab the dealer's attention because there is usually a three-day verbal, if not written, time frame from the sale of a unit to the payoff of the floor plan liability. If this three-day time frame is not met, the floor plan source can impose very strict rules on the dealership operation. For example, they can come in and pull an unscheduled floor plan audit. If the dealer is not operating within a three-day time frame, the finance source can go so far as to put a freeze on its bank account (if the finance source is also the banking source).
In order to modify your contracts in transit, be prepared to answer two questions:
1. Does your primary finance source pay immediately when the contract is cashed by sending an EFT to your bank immediately?
2. If so, then how often do you take the contracts to the source?
It is important that the dealer modify his finance program if the finance source for secondary finance is not paying promptly. One secondary source had so much business it took them up to 25 days to process a contract. This is not an acceptable time frame for you or any dealer. This procedure must be modified by the finance source and the dealer so you can have immediate use of your funds.
How to MONITOR your Contracts-In-Transit
When monitoring this calculation daily or every other day, the dealer will also find returned or bounced contracts in this account balance.
There are several questions you need to ask your staff. How many bounced contracts did you receive this month? How swiftly were they corrected and resubmitted to lender? What was the cause for the contract being bounced so you can correct the problem if it is internal?
How do you transport your contracts to the finance source? Do you maintain a daily log of the runs delivering your contracts to the finance source? How soon after the finance contract is delivered to the finance source are the funds actually deposited in your bank account? In what form is the payment made? (Check handed to a runner, sent by mail, or deposited by EFT.)
Each of the above, is an important question to consider when attempting to maintain a three-day supply of CIT. Certainly, the situation calls for the dealer to be involved if the number exceeds four days. Remember that your dealership capital can easily freeze in the CIT account because no one is looking or paying attention.
Conclusion
If contracts are not promptly cashed, but the dealership is paying off the sold floor planned unit, it will not take long before the dealership notices a reduced or tight cash flow situation! Now that you know what to look for in your dealership, there is no reason to have any frozen capital in this account.
So go thaw it!