Dealership Financial Statement Analysis: The Advanced Course With Ron Sompels, CPAstrong Moderated by Mike Bowers, Executive Editor at DealersEdge Ron Sompels, CPAstrong Ron Sompels, CPA: Ronald Sompels is a partner at Crowe Horwath LLP, a top 10 public accounting and consulting firm. Mr. Sompels, a CPA and CPIM, is the Partner-in-Charge of Crowe s Retail Dealer industry horizontal and has more than 30 years experience in providing assurance, tax, risk management, financial advisory, and performance consulting services to more than 600 retail dealerships. He has conducted courses on many subjects, including inventory control, and is a published writer, with articles featured in trade magazines, periodicals, and business journals. Mr. Sompels holds a Bachelor of Business Administration in Accounting from Western Michigan University. 1
How to Read and Analyze the Dealership Financial Statement Ron Sompels, Partner Crowe Horwath LLP What You Should Ask/Know Before Using the Statements What entities are included in the statement? Statement may include the activities of more than one franchise. Is the real estate included in the balance sheet? If not Is it owned by a related party? If it is. o Is rent being charged at fair market value? Is there a management company? If so How are management fees allocated to the dealership? Are there any other ancillary companies associated with the dealership such as a reinsurance company? How are the results of those companies reflected in the statement..if at all? Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 4 2
What You Should Ask/Know Before Using the Statements What is the basis of presentation? GAAP? TAX? Most likely Dealership Accounting Accounting Methods and Common Book/Tax Differences LIFO vs. FIFO? Goodwill treatment? Depreciation methods? Other differences? Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 5 Common Policies under Dealership Accounting Manufacturers have cash and other financial requirements that Dealers do not necessarily agree with and as a result, Under Dealership Accounting Cash is not necessarily cash Cash Plugs Most common way to get in Compliance Description A/C # Debit Credit Cash in Bank 2020 $ 600,000 Note Payable - Owners 3410 $ 600,000 (To record month end Cash Entry) Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 6 3
Common Policies under Dealership Accounting Under Dealership Accounting Working Capital is not necessarily Working Capital Working Capital plugs Current portion of long term liabilities Reserve adjustments Bad Debt Parts obsolescence LIFO Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 7 Common Policies under Dealership Accounting Under Dealership Accounting Net Worth may not be Net Worth Water in the balance sheet assets Lower of Cost or Market used vehicles Physical Inventory adjustments Unicap Assets? Personal Assets held in the store Related Party receivables Prepaids with no continuing value Most dealerships are structured as pass through entities. Distributions need to be made to pay taxes. However, these distributions are rarely accrued. Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 8 4
Common Policies under Dealership Accounting Under Dealership Accounting a year contains 13 months! Be very wary of interim statements particularly the balance sheet. In the 13 th month, most of the common errors and accruals get trued up. Still some GAAP adjustments need to be made. Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 9 Balance Sheet Understand the Policies etc. above Provides the only comparative piece of information in the statement Monthly net income number. Other information Aging of Receivables and Inventory Inventory to Floor plan Working Capital Compliance LIFO reserves Goodwill Liabilities to Net Worth (FIFO) Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 10 5
Operating Statement Before reviewing the operating statement you should understand that under Dealership Accounting many items get buried in Other Income Often this line in the operating statement contains the majority of the dealer income! Need to understand what is in here Packs Incentives Doc fees Other items Also understand the Dealership s policy of Accounting for manufacturing assistance Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 11 Other Income Reclassifications Other Income/Other Deduction Balances Dealership: Sample Toyota Store Account # Account Name Line on Fin Stmt YTD Balance Reclass to: 5121New Vehicle Pack Other Income (150,700) New Vehicle Gross 5221Used Vehicle Pack Other Income (236,290) Used Vehicle Gross 9140Doc Fees-New Other Income (300,196) New Vehicle Gross 9145Rental Income Rental Income (4,940) Leave Other Income 9150Misc Income Other Income (292,195) New Vehicle Gross 9151DT Holdback Other Income - New Vehicle Gross 9152Bad Debt Writeoff Other Income 8,853 Bad Debt Expense 9155Haz Mat Shop Supply Other Income (3,099) Service Gross 9240Doc Fees-Used Other Income (176,709) Used Vehicle Gross 9420Credit Card Discounts Other Deductions 7,991 Misc Expense 9440Cash Discount Other Deductions - Leave Other Income 9450Misc Income-Svc Other Deductions (1,410) Service Gross 9470Rental Vehicles Other Deductions 15 Leave Other Deductions 9480Misc Deductions Other Deductions 7 Leave Other Deductions Total Other income/deductions (1,148,673) New Vehicle Gross (743,091) Used Vehicle Gross (412,999) Service Gross (4,509) Total (1,160,599) Other 11,926 Total Other income/deductions (1,148,673) Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 12 6
There are several ways that the Manufacturer s statements present this. Most show a Total Dealership column which includes Sales Gross Profit Itemized List of Expenses Expenses are listed in various categories Selling Expenses Personnel Expenses Variable Expenses Departmental Operating Expenses Semi Fixed Expenses Overhead Expenses Fixed Expenses Expenses are also measured as percent to total gross, per new vehicle sold, or percent to total sales The same format is used to show each department s expense which adds to the total Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 13 Problems No common format makes it difficult to compare stores No comparative data or benchmarks Many of the expenses (mostly fixed in nature such as insurance, rent, or others such as employee benefits or payroll taxes) are difficult for department managers to control. They are allocated to the departments based on square footage or personnel cost. Need a better way to manage Many Dealers have a tool they use to analyze their statements. Ask them for it!! Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 14 7
A good analysis tool will... Contain comparative data Analyze contribution margin by department Analyze controllable expense as a percent to gross Segregate fixed costs Compare to benchmarks Suggest separating expenses into two categories Controllable Expenses Non Controllable Expenses Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 15 New and Used Vehicle Departments - Controllable CONTROLLABLE EXPENSES Commissions Advertising & Promotion Supervision Interest - Floorplan F&I Compensation and Expense Demos/Company Vehicles Other Salaries Prep, Deliver & Policy Other Controllable Expenses * Total Controllable Expenses * Includes Equipment, Other Supplies and Training Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 16 8
New and Used Vehicle Establish Benchmarks as a % to Gross Profit % of Total Gross CONTROLLABLE EXPENSES New Used Commissions 24.0% 23.0% Advertising & Promotion 12.5% 13.0% Supervision 10.0% 10.0% Interest - Floorplan 0.0% 1.0% F&I Compensation and Expense Demos/Company Vehicles 2.0% 1.0% Other Salaries 3.5% 3.5% Prep, Deliver & Policy 2.0% 2.0% Other Controllable Expenses * 1.5% 1.5% Total Controllable Expenses 55.5% 55.0% * Includes Equipment, Other Supplies and Training Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 17 Fixed Operations Departments - Controllable CONTROLLABLE EXPENSES Salaries & Wages Advertising Demos/Company Vehicles Policy Adjustment Tools & Supplies Other Controllable Expenses * Total Controllable Expenses * Includes Equipment, Other Supplies and Training Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 18 9
Fixed Operations Departments - Controllable % of Total Gross CONTROLLABLE EXPENSES Serv. Parts Body Salaries & Wages 34.0% 28.0% 34.0% Advertising 2.5% 4.0% 2.0% Demos/Company Vehicles 1.0% 2.0% 1.0% Policy Adjustment 2.0% 0.5% 2.0% Tools & Supplies 7.0% 1.5% 3.0% Other Controllable Expenses * 2.0% 2.6% 1.5% Total Controllable Expenses 48.5% 38.6% 43.5% * Includes Equipment, Other Supplies and Training Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 19 Other Non Controllable Expenses % of Total Gross EMPLOYEE EXPENSES Salary Administrative 3.0% Employee Benefits 3.0% Payroll Taxes 4.0% Total Employee Expenses 10.0% INSTITUTIONAL EXPENSES Institutional Advertising 0.0% Insurance 2.0% Office Supplies 0.7% Taxes - Other 3.0% Total Institutional Expenses 5.7% SERVICES Data Processing 1.7% Outside Services 2.9% Professional Services 1.0% Total Services 5.6% Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 20 10
Other Non Controllable Expenses % of Total Gross FACILITY Telephone 1.0% Utilities 2.5% Insurance - Building 0.0% Repairs and Maintenance 0.0% Taxes - Real Estate 0.0% Total Facility 3.5% MISCELLANEOUS EXPENSES Depreciation 1.5% Interest 1.0% Miscellaneous 0.5% Travel & Entertainment 0.5% Other General & Administrative 0.0% Total Miscellaneous Expenses 3.5% Total Before Rent 28.3% Rent & Equivalent 7.0% Total Non-Controllable Expenses 35.3% Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 21 Make Comparable CONTROLLABLE EXPENSES Bench % of Gross March April May Commissions 23.0% 320,062 14.7% 435,663 13.8% 410,304 13.3% Advertising & Promotion 13.0% 177,428 8.1% 172,795 5.5% 154,581 5.0% Supervision 10.0% 275,461 12.6% 428,139 13.5% 456,745 14.8% Interest - Floorplan 1.0% 128 0.0% 0 0.0% 2,428 0.1% F&I Compensation and Exp 58,861 2.7% 82,567 2.6% 73,374 2.4% Demos/Company Vehicles 1.0% 20,640 0.9% 21,511 0.7% 28,492 0.9% Other Salaries 3.5% 8,500 0.4% 9,750 0.3% 11,587 0.4% Prep, Delivery & Policy 2.0% 35,876 1.6% 52,941 1.7% 56,277 1.8% Other Controllable Expenses * 1.5% 8,992 0.4% 3,476 0.1% 11,056 0.4% Total Controllable Expenses 55.0% 905,949 41.5% 1,206,842 38.1% 1,204,844 39.1% Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 22 11
Gross Profit Analysis New SALES - UNITS Benchmark Dec 2011 (YTD) Per unit Dec 2012 (YTD) Per Unit Dec 2013 (YTD) New Car - Retail 463 554 545 New Truck - Retail 419 167 209 Total New Units 882 721 754 GROSS New Car - Retail 1700 4,401,260 9,506 3,030,597 5,470 4,333,460 7,951 New Car Incentives (Memo Only) 4,179,152 (0) 2,775,825 (0) 3,969,179 0 New Truck - Retail 1550 183,598 438 (140,785) (843) 120,734 578 New Truck Incentives (Memo Only) 0 0 0 0 1 0 New F&I 700 418,861 475 464,250 644 748,653 993 Fleet & Other New 400 41,144 5,005 25,110 Total New Gross 5,044,864 5,720 3,359,067 4,659 5,227957 6,933 Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 23 Gross Profit Analysis Used Benchmark Dec 2011 (YTD) Dec 2012 (YTD) Dec 2013 (YTD) SALES - UNITS Used Car Retail 161 238 175 Used Car Retail - Certified 253 469 502 Used Truck - Retail 0 0 0 Used Truck - Retail - Certified 0 0 0 Wholesale 314 444 559 Total Used Units 728 1,151 1,236 GROSS Used Car - Retail 1,600 736,403 4,574 752,968 3,164 378,321 2,162 Used Car - Retail - Certified - 949,615 3,753 1,496,346 3,191 1,459,827 2,908 - Used Truck - Retail 1,600 0 0 0 0 0 0 Used Truck - Retail - Certified - 0 0 0 0 0 0 Wholesale - 214,988 685 356,554 803 745,663 1,334 Used F&I 700 282,892 687 559,578 791 496,388 733 Other Used - 0 0 0 Total Used Gross 2,183,898 5,301 3,165,446 4,477 3,080,199 4,550 Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 24 12
Gross Profit Analysis Service Benchmark Dec 2008 (YTD) Dec 2009 (YTD) Dec 2010 (YTD) SERVICE SALES Customer Pay 2,647,869 52.1% 3,151,689 61.2% 3,401,948 64.0% Warranty 1,438,500 28.3% 1,005,306 19.5% 900,096 16.9% Internal 421,193 8.3% 528,489 10.3% 515,657 9.7% Sublet 330,582 6.5% 216,177 4.2% 245,418 4.6% Other 245,453 4.8% 251,105 4.9% 255,341 4.8% Total Service Sales 5,083,595 100.0% 5,152,765 100.0% 5,318,460 100.0% GROSS PROFIT Customer Pay 72.0% 2,066,958 78.1% 2,515,586 79.8% 2,758,045 81.1% Warranty 72.0% 1,093,373 76.0% 783,420 77.9% 701,715 78.0% Internal 69.0% 307,206 72.9% 379,309 71.8% 377,448 73.2% Sublet 7.0% 78,200 23.7% 67,928 31.4% 66,435 27.1% Other 0.0% 126,906 51.7% 125,822 50.1% 113,172 44.3% Unapplied (-) 0.0% (3,747) -0.1% 0 0.0% 0 0.0% Total Service Gross 3,668,896 72.2% 3,872,065 75.1% 4,016,815 75.5% Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 25 Gross Profit Analysis Parts PARTS SALES Benchmark Dec 2008 (YTD) Dec 2009 (YTD) Dec 2010 (YTD) Customer Pay 2,344,063 39.0% 2,814,888 45.2% 2,748,845 44.3% Warranty 1,918,002 31.9% 1,339,613 21.5% 1,347,757 21.7% Internal 208,673 3.5% 335,592 5.4% 288,164 4.6% Wholesale 631,223 10.5% 700,869 11.3% 674,144 10.9% Counter 192,443 3.2% 169,916 2.7% 153,268 2.5% Other 717,731 11.9% 862,202 13.9% 994,932 16.0% Total Parts Sales 6,012,135 100.0% 6,223,080 100.0% 6,207,110 100.0% GROSS PROFIT Customer Pay 40.0% 959,112 40.9% 1,165,989 41.4% 1,119,883 40.7% Warranty 27.0% 540,382 28.2% 394,095 29.4% 416,410 30.9% Internal 20.0% 35,599 17.1% 66,528 19.8% 54,621 19.0% Wholesale 23.0% 147,341 23.3% 166,536 23.8% 176,663 26.2% Counter 34.0% 70,033 36.4% 59,589 35.1% 61,464 40.1% Other 20.0% 122,753 17.1% 131,464 15.2% 162,214 16.3% Parts Adjustment 0.0% 313 0.0% (66,820) -1.1% (100,735) -1.6% Total Parts Gross 30.0% 1,875,533 31.2% 1,917,382 30.8% 1,890,520 30.5% Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 26 13
Other Metrics That Are Helpful Sometimes it is helpful to look at controllable expenses on a per unit basis Commissions (new and used) Advertising (new and used) Supervision (new and used) Also make sure periods being analyzed are comparable. (Annualize results if necessary) Other measures that are helpful New and used vehicle and parts inventory days supply Floorplan to Inventory Ratio CIT/VR days supply; P&S receivable days supply; Warranty receivable days supply; Finance Receivables days supply Avg. Cost of used retail units sold to Avg. (FIFO) cost of units in inventory Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 27 Other Information in the Statements Be careful because much of the information is based on Memo Accounts which are inputted monthly Receivable Analysis Inventory Analysis Hourly Labor Rates for Technicians Labor Hours Repair Order Counts Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 28 14
Other Information in the Statements 1 Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 29 Other Information in the Statements 2 Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 30 15
Other Information in the Statements 3 Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 31 Other Information in the Statements 4 Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 32 16
Other Information in the Statements 5 Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 33 Key Benchmarks by Department Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 34 17
Key Benchmarks by Department Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 35 18