Ownership/Operations
Thawing Frozen Capital
By Fred Samuelson
Other Receivables -Do You Use the Account?
This account is not found on all automobile manufacturer's financial statements. For simplicity, some manufacturers combine or suggest that "Other Receivables" be combined with the general Accounts Receivable control account. However, those that do have "Other Receivables" in their chart of accounts put it to use for usual and/or special circumstances, such as loans to employees, or to record loans by the dealer to members of his or her family.
How to measure your "Other Receivables" frozen capital
Review your printout of the "Other Receivables" account just as you would the "Vehicle Receivables" or "Parts & Service Receivables" schedule. Involve your managers as appropriate. In one particular instance a multi-point (5) dealer had occasion to lend his brother a very large sum of money-$600,000. This huge immediate cash withdrawal put immense pressure on the dealer's cash flow. Unknown to the dealer, the comptrollers of the various dealerships were moving money back and forth between dealerships to maintain proper control over their floor- plan payoffs. Eventually money became more than a little short, and the dealer wanted to know why.
"Well boss," one comptroller said, "You know you lent this $600,000 to your brother and there are no records of any money coming in and it has put a big hurtin' on us." The Dealer immediately reacted by getting on the phone to his brother asking for more than a small partial repayment on this interest-free loan, because it had materially affected the normal operation of his businesses. Unfortunately the funds arrived too late. The bank became very much involved in the situation after performing an unscheduled floor-plan audit, noting that sold units were not being paid off in the agreed-upon three-day time limit. How would you like to have your finance source-who is also your local banker-put a hold on your checking account? This dealer suffered that humiliation until all floor-plan obligations were brought up to a current sales condition. Did this get the dealer's attention? You bet it did.
Another dealer might use this "Other Receivables" account to record a loan to an employee. Now suppose that a very good mechanic working for you needs a temporary, but significant, loan. Money is advanced on the service manager's authority. Timely payroll deductions are made, but only for a few months. A few months after the loan advance, the mechanic stops performing his usual quality work in his usual timely manner. The service manager cannot maintain the mechanic's interest in putting the service work out one time and one time only. Much of his work kept coming back. But, could they even consider terminating him now? No, because the outstanding balance of the loan was still very large. The dealer could sue the mechanic, but other than having an endorsement on the back of the original check, the dealership has no signed loan document from the mechanic. Assuming the balance due is over $1,000, what would you do to rectify the situation?
How to modify your "Other Receivables" frozen capital
Put a notice in your employee handbook as follows:
"We have just completed a deal with our bank. They agreed not to sell cars and we agreed not to make any cash loans. So, if in the future you should require short- or long-term financial assistance, we will be happy to put you in contact with our local banker."
If that is not to your liking, then set a policy of the dollar amount each manager can go to and nothing higher. Specify the method of repayment. The document must be signed, notarized and initialed by another manager, preferably the office manager or secretary/treasurer. Retain the document in a specific folder, or in the employee's historical folder for these types of loans.
How to monitor your "Other Receivables" frozen capital
The dealer should monitor this account the same way that he would monitor "Vehicle" or "Parts & Service" receivables. Sit down each month with the schedule in hand and review the applicable departmental "Other Receivables" as noted. If there are none, then obviously the managers do not have to be present. Also, if you do not-as a policy-make loans to your employees or family members, this account category can be used easily for monies due from the factory for various incentives or promotional programs. You are just letting everyone know that you "care" and want to make sure that everyone is performing their job to the best of their ability. Inspect what you expect from all employees.
Conclusion
As you can see from the above, even though when this account is used, it probably has nothing to do with the actual day-to-day operations of the dealership. But it can have a very significant impact on the dealership day-to-day operations when something goes wrong because of the lack of management over this account.
As an aside to this category, I would like to mention another point. Dealers spend huge amounts of money on training for the sales force, for the mechanics, warranty clerk, parts countermen, etc. One thing you might consider doing is securing a competent money management advisor, not with the idea of taking over the control or investments of your employees, but to educate them on some basic financial or money management practices. This could include preparing a budget so that they have a financial plan on how to live within their income, how to set up systematic savings plans for retirement, for educating the children, the purchase of a new home or just for rainy day survival when bad things happen. I believe the employees would very much appreciate the fact that someone is showing an interest in their lives that is not specifically job performance related.
Fred Samuelson is the chairman of the board for MRI Associates, which provides financial statement analysis for the automobile dealer community. fsamuelson@dealeronline.com
