Ownership/Operations
Thawing Frozen Capital
By Fred Samuelson
How to Measure the Float in Your Cash Account
During my frozen capital seminar at the NADA convention in San Francisco, I asked the audience if they had ever heard of the term "sweep account." At most 12 to 15 hands were raised out of a room of more than 160 people.
For those who do not know, a sweep account is a method by which a dealer can rent the store's cash float to the bank. Currently, the bank is using your excess balance to satisfy its Federal Reserve requirements for overnight cash. Are you paid interest for the use of this money? Unless you have an agreement with your bank, you do not have a sweep account. I suggested that the managers attending NADA, those who were not using a sweep account, do a little homework on a simple, easy-to-use form I designed. The idea is to determine your float by comparing your dealership general cash bank account balance and the cash balance at your local bank one day later. By recording these numbers over 30 days, the dealer can calculate the average real-time float. Prepare this worksheet for two months, and then pay a visit to your local banker with information in hand. Show the banker your calculations and say you want to discuss opening a sweep account. If they refuse, as some will, then strongly consider taking your business to another bank that will not be reluctant to offer you a sweep account.
Example of float: Let's assume that your checkbook balance is $250,000 on day one and the bank shows you with a balance of $400,000 one day later (after the day one deposit has been recorded)-a difference of $150,000. Further, suppose you and your banker agree that your business requires operating cash of $65,000 a day. Subtract the $65,000 from $150,000, leaving $85,000. With a sweep account, the bank will borrow this $85,000 for its overnight deposit requirements and pay you interest on this daily calculated sum every day for the privilege of using your money. Remember that there will not be one single entry on your bank statement to reflect this sweep. They will just calculate and credit. Again, please understand they are probably already using this excess bank balance and not paying you anything. To initiate a sweep account you have to formally request a contractual interest payment agreement with the bank. It is possible to earn thousands of dollars per year depending upon the bank balance you carry and the interest paid. Check it out-you will like what you find. A bank president invited me to lunch one day to discuss how he could attract more automobile dealer business. I asked him if he had considered offering all the dealers a sweep account. His reply: "Are you crazy? That is where I really make my money." So much for the banker wanting to attract more automobile dealer business.
How to Modify the Float in Your Cash Account
The first thing is to create a separate bank account for your payroll. And watch out for some very innovative thinking on the part of your people responsible for preparing the payroll. One very inventive person wrote a check to themselves each month in the amount of $1,000, with a federal tax deduction of $700 and a state tax deduction of $300. Net check was zero dollars. The person actually received the $12,000 when they filed their income tax at the end of the year. How could this happen, you say? Well, the dealer did not peruse the payroll each week when he signed the checks. Nor did he check the sequential numbers of the payroll. A zero dollar check is really a void, right? NO IT IS NOT, as this example clearly shows. This should be a good example to prove to you that you, the dealer, must be involved with your dealership operation at all times. Inspect what you expect from each and every department. And if you really want to become innovative, ask your bank to prepare your bank reconciliation each month. This just might help reduce your audit bill each year because your internal bank reconciliation is six months behind. Think about it. Further, when you have measured your excess cash or float, depending upon the float, draw off a portion of the excess and invest it elsewhere. Such as with your floor plan provider. They will usually pay 1/2 % over floor plan rate for all funds invested. Now you have put your money to work for you just as hard as you worked to earn it.
Since this article was originally written, the manufacturer has changed the rules in that the dealer can no longer keep a loan balance in force equal to the floor plan balance. It must be considerably less. And the interest is less.
How to Monitor the Float in Your Cash Account
Thinking about payroll accounts, how much money did you fund your payroll account with? One dealer established his payroll account 25 years ago with $35,000 when he only needed $500. That is $34,500 more than required. It just sat there for 25 years not generating any interest for the dealership at all. At 6% compounded for 25 years, that is close to $110,000 the dealership lost in non-operating profit. When this was pointed out to the dealer, the very next day he was at the bank withdrawing the funds from payroll and depositing same in the general fund. How much were you required to deposit when opening your payroll account? Incidentally, the auditors never informed the dealer that he had any idle money sitting in the payroll account. They just informed the dealer that the audited books were in balance.
Fred Samuelson is the chairman of the board for MRI Associates, which provides financial statement analysis for the automobile dealer community. fsamuelson@dealeronline.com
