Ownership/Operations
Thawing Frozen Capital
By Fred Samuelson
Accounts receivable - parts, service, and body shop
Accounts receivable is the total of all monies due the dealership from approved customer charge accounts generated by the parts, service and body shop operation. These accounts can be reflected in individual charge accounts or credit cards.
After having spent more than 48 years in the automobile business, I can state one thing with absolute certainty: It is imperative to have a written policy on parts, service and body shop receivables in order to monitor this potentially large account, certainly a good source of frozen capital. Be sure this is a policy that is in practice and not just in your mind.
Once you have a written accounts receivable policy, hold a minimum of one meeting monthly with your managers to review the receivables in each of their departments. This active involvement in the daily operation of your dealership says to your staff loud and clear, "I care."
One particular dealer had a policy of cutting off credit privileges for customers who did not respect their 30-day charge account policy. The secretary treasurer told the parts manager that he had to put a particular account with an over 30 day (ongoing) balance of $30,000 on a COD basis because the customer would not respond to phone calls for payment of the outstanding balance. The parts manager refused to cut off one of his best customers, saying this customer has been with him for over 10 years and buys a lot of parts every month.
The secretary treasurer went to the dealer to discuss the problem. Guess what happened? The dealer went along with the parts manager, and now the account has a $30,000 balance that is over 90 days and about the same amount over 60 days old.
Just exactly who is in charge of your dealership credit department policies? Is it the dealer, the secretary treasurer, or the parts manager? The aforementioned situation is still unsettled. Don't think that this couldn't happen in your dealership. It won't occur if you're a take-charge leader who stays involved with the people who monitor and manage your money.
How to measure your parts, service, and body shop receivables
With wide acceptance of credit cards, the majority of
customers pay their bills by this means immediately. Therefore, a major source of potential overaged receivables has been eliminated.
However, there are many ways accounts receivables frozen capital can accumulate. Commercial customers often request credit; fellow automotive dealers still purchase parts from you on a regular basis; insurance companies require a charge account, not necessarily for the original repair, but for supplementals. So the problem you're faced with is what to do with the parts charge accounts and with the body shop charge accounts.
It is up to the dealer to hold monthly meetings with the department heads to measure the outstanding balances. Once the outstanding balances have been measured, knowing how to modify them is the next challenge, in light of the fact that credit is a privilege, not a right.
How to modify your parts, service, and body shop receivables
Most dealers that effectively thaw accounts receivable frozen capital have a policy to handle charge accounts, which are not paid in a timely manner. Someone in the accounting office is assigned to make the necessary calls to late-paying customers.
Those who do nothing and let the past due balances grow without any control whatsoever actually have bigger problems than just frozen capital. So let's go back to the basics. Start by giving someone the authority to collect the resulting balances that they had the responsibility to issue. Those two words go hand in hand-authority and responsibility.
For example, one dealer had a problem with his receivables - the body shop past due accounts were out of control. One supplemental charge of $5,600 was over 6 months old.
This particular body shop manager could really move the metal. Jobs zipped through the shop, and "comebacks" did not occur. However, the manager did not know how to get the work out of the shop and still control the supplementals. Neither the manager nor the dealer's accounting office had time to follow up on the charges. After conducting a frozen capital analysis, the dealer hired an administrative clerk to assist the body shop manager. The clerk also now handles the insurance supplementals. Today, the dealership no longer has a collection or past due problem. The accounts are current and in balance.
How to monitor your parts, service, and body shop receivables
Effective dealers conduct frozen capital meetings at least monthly to review the accounts receivable with each manager. Even if no problem exists, this activity demonstrates an interest in the financial health of the store.
To monitor your accounts receivables, the accounting department should first separate the receivables by department so the account balance displayed is specifically for that department. For example, "other dealer accounts" for the parts department, or "insurance company accounts" for the body shop.
Next, make sure that the accounting department cashes or submits credit card charges at least every other day for payment by the Visa, MasterCard, and American Express vendors.
Finally, remember that credit is a privilege, not a right. If a customer wants to charge with you, then they must remember that timely payments on the account will allow them to continue exercising their credit privileges at your dealership.
Fred Samuelson is the chairman of the board for MRI Associates, which provides financial statement analysis for the automobile dealer community. MRI also works hands-on, in-house with dealers to set up policies and procedures to correct inefficient operations, and provides follow-up phone coaching for selected managers. fsamuelson@dealeronline.com
