The Four Pillars of Retailing : Pillar Four - Getting the Numbers Right

By Chad Carr

Do you know the ten steps you need to take to make sure you know exactly how much money you have and where it is to sustain profitable operations?

Over the last year, I have been writing about the Four Pillars of Retailing, or the four key disciplines, that every dealer must master if they are to achieve long-term profitability and financial stability. So far we have discussed the importance of hiring and maintaining the right people; how to make sure you are putting together good deals; and how to adjust your inventory so you have the right products for your market place.

The Fourth and Final Pillar – Getting the Numbers Right – is probably the most likely to make a dealer’s eyes glaze over. By “the numbers,” I mean the tools you use to control and manage your business. These numbers include, but are not limited to, your Income Statement, your Balance Sheet, your Bank Balances and Inventory.

The majority of dealership owners don’t come from a financial or accounting background, and to say they are not comfortable with the numbers is a bit of an understatement. Most of the owners I know understand in their head what is going on in their business very well, but when asked to translate that into numbers or to interpret the numbers on their financial statements, they get very uncomfortable.

For many owners, this discomfort translates into becoming over-reliant on a bookkeeper or accountant to handle all the numbers of the business. The result is almost always a chipping away of the owner’s independence. Often, lack of confidence working with the numbers translates into dealers limiting themselves to a much smaller business than they are truly capable of running.

One of the primary activities of our business is to help owners gain control over (and an understanding of) their numbers. In future articles, I will share with you some of the important ways you can use numbers such as your Financial Statements to stay on top of the financial health of your business. For now, I want to focus on why it is critical for you to know that your numbers are correct. I will give you practical steps you can take to make sure the most important numbers for your business are accurate.

Why you need to know your numbers are correct

When a dealership is very small, owners can keep the important numbers in their head. When you are talking to every customer, writing every check, taking every deposit to the bank, managing the set-up and delivery and taking all the service requests, your computer brain is constantly tracking what is happening. Even if you can’t translate what is happening into numbers readily, the odds are you have tight control over your dealership’s cash and profits.

As sales grow, however, the owner’s computer brain starts losing track of important facts and you need to have additional tools (numbers) to keep track of the key areas of the business. For example:

• Job Costing, at some number of homes, becomes too complicated to remember everything, and losing control of costs mean losing control of profits.
• Individual deal details are not as easily remembered or recalled, especially when a trade is involved.
• Keeping track of cash becomes more than just knowing what is in the checking account. At some point, cash outflow before the deal proceeds-check arrives can get out-of-hand.

A good benchmark for determining when the owner’s computer brain no longer has the capacity to keep on top of all the numbers is when the owner starts asking questions like:

• Where’s my money?
• If I’ve made all this profit and have all this net worth, where is the cash for me to make payroll and pay bills?
• How could I have not remembered that so-and-so owes me money, or that I had that important bill to pay?

While the point at which this happens varies from owner to owner, it is almost certain to happen when a second location is opened, or when sales grow to about three million per year. Even for those owners experiencing only minimal growth, it is only a matter of time until the ability to keep the numbers in their heads becomes elusive.

In strong upswing markets, owners may find themselves in the enviable position of growing sales volume with more business than they can handle. But, what should be a fun time with plenty of sales and bottom-line profits can soon become overwhelming in terms of paperwork and all the gory details of keeping deals together and customers happy.

In down markets, a lack of control of the numbers leads to a lot of poor decision-making as owners try to remain profitable with smaller sales volume. Without timely and correct numbers indicating what is going on in the business right now (all the time), the owner makes decisions based on his or her gut or what other people may be doing or saying they are doing. While this kind of decision-making with faulty information is not always fatal, it is almost always not profitable.

Many of the decisions that come naturally to owners when they are small suddenly feel more complicated when they grow larger. That can lead to indecision (which we’ve seen a lot of lately) or just plain bad decision-making.

Having good numbers, and understanding what those numbers are telling you can help an owner to stay level-headed even in bad times. Our company works with many dealers who have maintained strong profitability and cash flow throughout this recent downturn precisely because they reacted to what their accurate numbers were telling them about their business instead of what the media was saying about the business environment.

Ultimately, having good numbers and understanding what those number mean will equate to the owner having more control over the business. In addition to reducing your control over the business, failure to stay on top of your numbers can also lead to two other big problems.

Problem #1 - Over-dependence on a bookkeeper or accountant

I know many wonderful people who are bookkeepers, controllers and accountants. But if an owner must rely on that person completely for their numbers, they are turning over far too much control of their business to that person.

Airline pilots do not hand over the controls of an airplane to their navigator, and owners should not turn over the reigns of the business to the numbers person just because they don’t want to have to dig into the numbers themselves.

If you think “handing over the reigns” sounds extreme, let me assure you that over the years I know myself of many, many dealerships where the bookkeeper was a key decision-maker in important decisions and some where the bookkeeper had absolute veto power. By the way, if your spouse is the bookkeeper, you may need to let them have this veto power - because they are your spouse, not because they are your bookkeeper.

No matter how loyal and wonderful your bookkeeper or accountant is, you owe it to yourself not to become completely dependent on that person. They are not the owner of your business.

Problem #2 – Exposure to Theft or Embezzlement

We work with people and their numbers all of the time and we get to hear a lot of horror stories. After 33 years of working with dealerships we know this to be true: If you have not yet been stolen from, you will be.

It is sad to say, but everyone gets taken advantage of over time – literally. The less control you have over the basic numbers of your business, the more often this will happen to you.

How you can know that your numbers are right?

You do not need to learn accounting or even do your own books in order to know your numbers are right. It is fine to rely on someone else to handle the books and prepare your reports, but you do need to have the basic ability to double-check their work.

What follows are ten basic steps that each dealer can take to help gain more control over their numbers. By doing these ten steps regularly, a dealer can be reasonably sure their numbers are right and they are not being taken advantage of.

1. INCOMING MAIL - The most basic policy to follow goes back to making sure whoever picks up and opens the mail is acting directly in your self-interest. It is always best for the owner to pick up and open the mail so you can know what checks came in.

The bookkeeper or the person preparing the bank deposit each day should not be the person picking up the mail. Also, the person writing up the deposits should not be the person who takes the deposits to the bank. Most amateur hanky-panky can be stopped by this one simple practice.

2. BALANCE BANK-PROCEEDS TO THE DEAL - Make sure the bank-proceeds balance to the amount to finance on the deal (whether calculated by hand or on a computer system). Do NOT allow your bookkeeper to change the deal to make it match the bank-proceeds check.

If you allow the bank-proceeds check to be your “proof source document” for determining the accuracy of your accounting, you are 100% sure to be losing money. Banks and finance companies are not always right, as much as we would hope they would be.

3. DEPOSITS AND INCOMING FUNDS – While receiving money is simple on the surface, it is extremely easy for small mistakes to get your cash balances and your accounting out of whack. A well-organized record of deposits is essential for a bookkeeper to be able to reconcile the cash in your computer system (if you have one) to your checkbook and to your bank statement – all three need to balance.

This is an area where we highly recommend some duplicate work. You should use a form to “write-up” all of the cash that you take in during a day.

Each day, the bank deposit receipt should be stapled to the front of this form so you can go back and see exactly what happened. To the back of this form, we would recommend attaching copies of any checks you received.

4. RECONCILE CASH REGULARLY - It is important that the owner reviews and double-checks the bank account reconciliation each month and asks questions (even if you have to make up a question). The same is true for the daily balancing of the cash drawer. If no one thinks you are checking and keeping on top of your checking account and cash drawer, two things will happen. First, they will stop filling out the forms and get sloppy. Second, someone will eventually realize you aren’t paying attention and will start keeping some of that incoming cash for themselves.

Your Bank Statement should be reconciled every month. It is fine if you don’t reconcile these yourself, but you should have someone other than the person handling all the cash do it. At the end of each month, you should look through the Bank Statements and the daily cash forms to make sure that everything makes sense to you. Make it obvious that you are looking!

5. PHYSICAL INVENTORY AUDITS - One of the best ways an owner can reduce inventory “shrinkage” is to make a big deal about counting the parts inventory. Computerized Point of Sale or Dealership Management Systems will create a list of what you should have, but you must regularly take that list and go out and count things.

For houses, you need to make sure not just that the houses are there, but make sure that you don’t have merchandising problems with poorly presented homes. Used homes need to be reviewed to make sure they are priced right and weren’t over-valued at the trade. If you are a multiple-lot dealer, it is very important to go on-site to look at the inventory periodically. I know of a dealer who was forced out of business because he had a manager stacking up so many trades (and saying they were worth a lot more than they were) that he ran out of cash.

For Parts, walk the parts area with a clipboard and count a shelf at a time. You do not have to do a complete inventory to get the benefits of your people knowing that you are counting your parts, but it is a good idea to have a complete inventory a couple of times a year. Software systems should make this much easier to manage.

6. BALANCE SHEET MUST FOOT – When looking at your Balance Sheet, you may see a lot of numbers that don’t make sense to you. It would be good for you to learn what all of those numbers mean, but at the very least you need to know the Balance Sheet “foots.” What that means is that the Total Assets must equal Total Liabilities plus Equity. If these do not match, it is impossible for your accounting statements to be correct. If you have multiple locations, check to make sure each individual location Balance Sheet foots.

7. NO SUSPENSE ACCOUNTS – Review your Balance Sheet and Income Statement and make sure you don’t have accounts that are just holding areas for jamming numbers. “Jamming” means that someone has made a mistake and is tired of trying to figure out where they made it, so they just “jam” some numbers in to make things match. One problem with accounting is that mistakes that look small could actually be the result of several very big mistakes that mostly cancel each other out. Don’t allow your bookkeeper or accountant to jam numbers into suspense accounts.

8. RECONCILE DEPRECIATION - You will need to look at what has changed in the Depreciation Categories from one Balance Sheet to the next, but this is simple subtraction. Then look at your Income Statement for that period of time. For example: take your Year End Balance Sheets for 2009 and 2008 and compare the amounts of Depreciation to find how much it has changed. That number should match the Depreciation claimed on your Year End Income Statement 2009. If the numbers don’t match, someone has made a mistake or is jamming numbers.

9. RECONCILE NET WORTH – This is another simple test of your accounting that you can do yourself. Much like Depreciation, Net Worth must reconcile between the Balance Sheet and the income statement. An increase in Net Worth on your Balance Sheet should correspond to the profit on your Income Statement. If you show a loss, your net worth should go down by that amount.

If you are using an off-the-shelf bookkeeping system like QuickBooks, it is very easy for these numbers to not reconcile. That is a sure sign that your accounting is wrong and the problem is, until you find the mistakes, you can’t really trust anything that your accounting statements are telling you about your business.

10. OUTSIDE HELP - An important resource to help you know your statements are correct would be your local accountant. Ask him how much it would cost to have him check things over. Even if he/she doesn’t understand the inner workings of your business, they should be able to tell if your accounting is fundamentally sound.

If you would like to have someone who understands accounting and your business take a look, call us at Rainmaker Software and we will take a look at your books for you. We are in the business of providing these kinds of services to dealerships around the country. We can provide you with a free basic consultation without your having to buy anything from us. We also can take a very complete look at all of your numbers and help you understand them for a very reasonable fee.

Once we spend some time together, you will better understand the differences between accounting information for Uncle Sam or your banks and the kind of information you need to run your operation. ##