KPMG Motor Industry Services Alert

Transcription

1 KPMG Motor Industry Services Alert October 2016

2 KPMG Motor Industry Services Alert 2

3 KPMG Motor Industry Services Alert 3 Profit is an Opinion, Cash is a Fact When I was sitting back and thinking about the content for this month s Motor Industry Alert I started to reflect on the last time the market was like it is today. Cash was plentiful, debt was freely available, inflation was non-existent, new showrooms were being built everywhere, the market was variable and grosses were hard to come by. Life was pretty good and the focus was clearly on growth, acquisition and profit, as nobody pays five times cash for a dealership. Early 2000 s we had survived the millennium bug, absorbed GST and things looked positive. However circumstances can change overnight and the car business (being pure retail) bears the brunt of change in consumer sentiment quicker than most. In good times we need to keep focus on good habits. After experiencing five periods of up and five periods of downturn in the past 35 years, I know it helps to stop, reflect and focus on the basics. I remember when the tide turned, and I spoke to my clients about shifting focus slightly to a few basic areas in their daily, weekly and monthly routine. This month, I d like to share them with you again.

4 KPMG Motor Industry Services Alert 4 Profit is an Opinion Every month your financial controller (FC) produces the month s results and four things happen: 1. We analyse the P&L results to last month, last year, the market and our peers. 2. We pour over our non-financial data, showroom stats, CSI, service retention, internet leads and staff turnover trying to rationalise the financial result (tomorrows P&L is todays test drive). 3. We change our focus, processes and stress levels subject to how the P&L results fall. 4. We make investment decisions, build a new showroom, buy new hoists, buy a new dealership and take some money for yourself based on the P&L. We all accept that the P&L is accurate. However, as a former accountant and dealership owner, I know the P&L is only as accurate as the balance sheet, which is the part of the business we tend not to focus on. If you have a good FC, you re not an accountant, life s busy enough and we still have cash in the bank, so it s fair enough to think things must be ok. It s times like this that you need to check the balance sheet. Remember every decision you are making is based on the P&L and this is only an opinion, not a fact. The things you buy and the changes you make are real. There are two things you can do: 1. Get someone external to review your balance sheet each quarter and prepare a where is my money statement. 2. Do the checking yourself (this will only be as good as your focus and understanding, so you might want to get someone to train you first). If you are going to check yourself, following are some of the things you should focus on. Remember this is not an exhaustive test, only a rule of thumb. If things aren t making sense, call in the experts. Technical conversion test Add up your new and demo stock and deduct your floorplan for new and demo, if this is negative (more floorplan than stock) you have technical conversion. If this amount is greater than your fleet debtors balance, ask, why? If it s very large get someone else to have a look at it. If you have used car floorplan, apply the same logic. This should never be negative. Debit provisions and accruals Provisions/accruals are taken up monthly to match your income with your expenses (we take the expense up this month as it relates to this month s trading, but we will pay the bill next month). If this is a debit that means we are paying bills, but not taking up the expense. This could be a hit to profit. It s better to know now than later. Vehicle stock We tend to review stock in units, not dollars, and this is where we get caught out. Assuming your unit review is telling you that you are carrying 45 days stock, do the simple test: Monthly sales volume * average sale value * 1.5 = balance sheet amount 100 new *$30,000 *1.5 = $4,500,000 If it s more, ask, why? Do the same for used and demo stock. Parts inventory Again, if you believe you have 45 days stock do the test. Monthly Total Parts Sales Monthly Totals Parts Gross = Parts Cost of Sales *1.5 = parts stock $200,000 - $70,000 = $130,000 *1.5 = $195,000 If not, ask, why?

5 KPMG Motor Industry Services Alert 5 Miscellaneous inventory accounts If these exist, ask, why? What else do you sell? Debtors Your debtors should be no more than follows: Parts and service debtors Factory and fleet claims Wholesale debtors Cash sale clearing = 45 days = 30 days = 7 days = 1 day Also just don t review ageing. Ageing will tell you old accounts, but may be hiding a cash blow out. Do the basic calculations, below are some examples. Monthly Trade sales $*1.5 = Parts and service debtors Monthly Warranty sales $* = Warranty debtors Dealer specific provisions Do I have the following in my balance sheet? These should all be credits: a. Deferred holdback this should be a credit equal to a month s holdback income b. New vehicle free service 1 month s new sales c. Used car warranty 3 months volume by your average per unit spend d. Harrier/in-house warranty does this account exist and can it be verified to independent statements e. Stock write-downs is the balance sufficient to cover my aged inventory and has it changed to last year? If it is less than last year, ask why as it is propping up your profit f. Loan account balances this is money lent to and from you or associated entities, ask each quarter for a full reconciliation of the movements g. Strange debits if you have debit balances you don t understand, ask for evidence of what they are. If the answer doesn t pass the sniff test call in the experts. If profit is right then you have half the journey covered. When you are making decisions you are doing this with the right data. Please remember nothing beats having your balance sheet reviewed by an expert on a quarterly basis. Cash is a Fact There is a saying in the car business that a dealership can lose money for 2 years before going broke, unfortunately this is fairly accurate. Dealerships are very cash positive due to the nature of floorplan financing, so often even the least profitable dealerships can be flush with cash (it just so happens to be the banks). The other problem with dealerships is that excess cash is often invested in the worst performing assets used cars, parts stock and debtors. In a deflationary environment these assets actually go down in value unless they are turned over quickly. When I started in business the dream of most dealers was to own the land and own the used car stock. However, as the gap between ownership and management widens the people in control of the cash are often not the owners of the business. This is where problems can start. I have always attested to the lean financing mechanism for dealerships: % floorplan of used and demo stock (even if you are the bank) 2. Withdrawal of 50% of profits quarterly (even if they are only put on deposit in the holding company) 3. Annual payout of all after tax profits 4. Funding of all new investments via in house debt (an intergroup loan at interest). The more cash you leave sloshing around in the dealership entity the more likely it is that this money will end up in the wrong assets, and end up losing its value (not even making a 3% bank deposit return). Set yourself up as the banker to avoid external interest costs, take the profits out in cash as dividends and lend it back in at interest. You become your own used car floorplan financier, you lend the working capital for more hoists or service loaners and you fund the new showroom. The tighter you keep the cashflow in the business, the less likely it is to be lost in trading assets and the more disciplined your people become around turning stock and collecting debtors. By paying out your profits quarterly, the accuracy of your profits is exposed immediately. If the profits aren t real, the cash isn t there.

6 KPMG Motor Industry Services Alert 6 Do a monthly hostage cash spreadsheet In your monthly management pack have a hostage cash calculation included. For example: Assets Balance Sheet Value Benchmark Level Hostage Cash New stock $6,000,000 $4,500,000 $1,500,000 Used stock $2,500,000 $1,500,000 $1,000,000 Parts stock $750,000 $450,000 $300,000 Parts and service debtors $500,000 $300,000 $200,000 Factory and fleet claims $600,000 $500,000 $100,000 Wholesale debtors $1,500,000 $1,000,000 $500,000 Total hostage cash $3,600,000 Above is not an unusual situation for many dealerships. The goal should be to free this hostage cash and return it to either the financiers or to your holding entity. In many cases the next showroom or the new dealership can be funded from the existing business. Where is my money? In most cases, Profit and Cash just don t align, so it is important that you do a quarterly where is my money statement. Known as a Source and Application of Funds statement, it basically reconciles your trading profit to your cash position taking into account the movements in your assets and liabilities. An example would look like this: Sources of funds (cash in) YTD trading profit $2,000,000 Non-cash items in profit Increase in Liabilities Applications of funds (cash out) Increase in Assets Depreciation expense Cash profit Increased Harrier provision Increase stock write-down Increased trade creditors Increased annual leave and LSL Reduced cash at bank Total Sources of Funds New hoists Increased used car stock Increased parts and service debtors Increased factory debtors Loan account movements Total Application of Funds $50,000 $2,050,000 $150,000 $100,000 $500,000 $150,000 $300,000 $3,250,000 $50,000 $1,000,000 $750,000 $1,000,000 $450,000 $3,250,000 The above example shows that the dealership made a $2 million profit, borrowed some more money from the staff and creditors and then spent the money on more stock, debtors and drawings. The money isn t lost, but given it s now invested in trading assets, is this reflected in more turnover and profit, or is it just sitting in hostage cash in deflationary assets? Until you do a where is my money statement you will never really know where your money is. Profit is an opinion, cash is a fact. I hope this alert makes you think about developing some good habits in good times and always remember to call in the experts if you have doubts or want to just get started. Thanks for reading.

7 KPMG Motor Industry Services Alert 7

8 Contact us If you would like more information contact: Wayne Pearson National Leader Motor Industry Services, KPMG Enterprise wpearson1@kpmg.com.au Also, meet the broader KPMG Motor Industry Services Team: David Pring KPMG Partner Enterprise Tax davidpring@kpmg.com.au Stephen May KPMG Partner Enterprise Audit smay@kpmg.com.au Matt McCarron KPMG Partner Enterprise Advisory mmccarron@kpmg.com.au Dean Robinson KPMG Specialist Advisor Deal Advisory M&A drobinson5@kpmg.com.au Aaron Street KPMG Partner Enterprise Advisory & Tax astreet@kpmg.com.au Bill Noye KPMG Partner Enterprise Advisory & Tax wnoye@kpmg.com.au kpmg.com.au The information contained in this document is of a general nature and is not intended to address the objectives, financial situation or needs of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to influence a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise). All rights reserved. The KPMG name and logo and are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. October VICN14739ENT.