Ownership/Operations
Thawing Frozen Capital
By Fred Samuelson
Finance Receivables
Finance receivables, what is your day's supply? Do you know how to calculate this number? Read on and we will show you what to do, but it must be done on a consistent basis if you are going to thaw out this frozen capital.
First, all finance contract agreements are not equal. You, the dealer, must apprise your sales and F&I departments of all finance source agreements in which the dealership is involved. Obviously, the accounting department must know of these arrangements also in order to be able to reconcile the month-end statements.
Why should this be done? Many finance sources pay 100% of the finance reserve when the contract is accepted. Others will pay only as the customer pays the monthly payment. So, if acustomer signs a 12-month contract, your reserve payment will be paid based on the "Rule of 78." In the first month you receive 1/78th of the reserve, next month 2/78 or 1/36, and so on until the final or 12th payment is made and you receive 12/78 of the reserve. This might sound confusing, but it is not unusual given the second-chance or hard-to-place, finance contracts that are available in our industry today.
How to Measure your Finance Receivables
To determine your day's supply of finance receivables, add the new and used finance reserve together for the month and divide by the number of days your sales departments are open for business. Make this same calculation for two months running. Take the two answers (the dollars produced per day by the F&I department), and then add these two numbers together, then divide that answer by two. Using this answer, divide the total current finance receivable balance by this two-month-rolling-average number to give you the number of day's supply based on two months of daily business production.
One reason for averaging two months is what we discussed above: all finance companies do not cut off at the same time each month. One finance source might cut off on the 25th,
another on the 27th, and another on the last day of the month. These different cut-off dates must be taken into consideration, especially when you are reconciling your books to the finance company month-end statement. Therefore, it is imperative that the dealer becomes interactive with his accounting and finance department so everyone knows what the measurement produced.
How to Modify your Finance Receivables
If the two-month-rolling-average of days receivable is over a 30-day acceptable standard, you must review each finance source account in detail to make sure the finance source is living up to its contract. Do you actually receive a check each month from the source? If not, then the reserve is frozen-in that you cannot deposit anything in your bank and you certainly cannot write a check against it. It is not a bad idea for the dealer to have lunch with the manager of the finance source from time to time, just to let the manager know that the dealer is "looking" at the numbers.
How to Monitor Your Finance Receivables
It really is a relatively simple calculation to determine what your day's supply is as you are progressing through the month. One dealer I happen to know very well checks this number along with his CIT on a daily basis. Especially the second chance financing sources. When a contract takes over three days to be processed by the finance company, then the dealer knows that he has a residual problem in his finance receivable. They go hand in hand. So what does he do? He picks up the phone and says, "Look, I have to write a check to pay off my floor plan, but you have not paid me for the contract of three days ago. When will I receive the money for these outstanding contracts so I can be current with my floor plan source?"
What else will the dealer do? He calls the manager of the finance source and invites him/her out to lunch. During lunch, you know what they are going to discuss. That's right, the promptness of paying for contracts OK'd by the finance source, but not actually paid to the dealership on a timely basis. It is absolutely amazing what can happen when a dealer shows the manager of the finance source that he is very interested in the operation of his dealership. Do you know that the finance company asked the dealer to send them a deposit slip for his bank? They now process the contracts and send the deposit to the bank for him (actually EFT). Since you know that a two- to three-days' time lag to pay off a contract is unacceptable, what are you doing to verify your turnaround time?
Once again we are talking about your money. Ladies and gentlemen, these are your operating funds. What are you doing to protect them?
