Thawing Frozen Capital
By Fred Samuelson
Warranty and policy receivables is one account on the dealership financial statement where you have an opportunity to work with OPM (Other People's Money). If your manufacturer provides you with a 15-day advance based on the historical average of your warranty & policy submissions, this provides you with an excellent opportunity to use OPM with just a little bit of due diligence, or follow up, on your part.
There is another aspect to this also, and that is, you would not leave a check in your cashiers drawer for two or three days before you recorded the transaction and deposited the check. Why wait for your money in this constantly busy department?
How to MEASURE your Warranty & Policy Receivables
From your financial statement, add up all of the warranty sales for the month-parts (both service & body), service labor and body labor. Divide this sales total by the number of days you were open for business that month. The answer will be the average dollar amount of claims written per day. You then check with the warranty clerk and service manager to see how much is being submitted each day, paid each day and in a receivable category each day. Congratulations are certainly in order if you are submitting and receiving acknowledgement of your accepted W&P claims daily. You are operating a very efficient department. At least one vehicle manufacturer pays these claims every workday. How about yours? By submitting claims daily, it is possible to operate with a maximum of three to four days supply of warranty claims at month-end, thus preventing a build-up of frozen capital. You also must be aware of returned or bounced claims. How many are there and what is the reason? Is it because of a clerical error in submitting the claim? Or, is it for a bad VIN number or repair operation code? When the dealer is asking the questions about why a claim was bounced, this goes a long way to tell the employees that the DEALER CARES-HE IS LOOKING AT WHAT IS GOING ON IN THE DEALERSHIP. It will not take long for this phase of the operation to get into shape.
How to MODIFY your Warranty & Policy Receivables
One particular dealer ran a very efficient W&P operation.
Claims were submitted and accepted with very few problems or rejections. How can we be sure it was efficient? Well, he was consistently operating with two to three days supply at month end. However, one eagle-eyed analyst noticed that this dealer's days supply began to climb dramatically. The analyst asked if any personnel changes had occurred in the department? Had he lost the W&P clerk who was doing such a good job? No, she was performing so effectively, she was asked to greet customers in the service lane as well. The analyst pointed out to the dealer that his W&P days supply had climbed significantly-to 28 days-which was clearly not in the dealership's best interest. An immediate personnel change was made. You see, the dealer modified his operation, but not for the better. It proved to be expensive in the dealership operation. But, because of what the analyst picked up, the employee is back in her former position, doing what she did best, working the W&P office for the dealership.
How to MONITOR your Warranty & Policy Receivables
The dealer can easily monitor his W&P operation just by periodically asking for the numbers that go into making up the measure phase of this operation. Performing this calculation two or three times a month will not only give you a good idea of how efficient the W&P operation is working, but you will get a bird's eye view of the daily paper flow. Are we submitting claims on a daily basis, or are we dumping on the factory the last week of the month. You will be surprised what you can find out. One particular dealer, not paying attention to his W&P department, actually lost his dealership! One year the store not only submitted a large volume of claims for its size, location and prior year comparison, but, as you might imagine, many of the claims were fictitious. Suspecting a serious problem, the manufacturer conducted a warranty & policy audit and uncovered the fraud. The total value of fraudulent claims was close to one million dollars. For that violation of trust, the dealer rightfully lost his business. It is imperative that the dealer stay involved with his business by reading the financial statement and meeting with his staff on a regular basis so that this would never happen to him.
Employees may come and go, but the person with the greatest concern for the honesty of the store's operation must be the dealer. Maintain a continuous vigilance over warranty and policy receivables as this is one of the 10 most important sources of frozen capital that can come back and bite you very hard. So much so that you could lose it all.
Due diligence is mandatory on the part of the dealer.
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
