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Accounting Cuts Can Hurt

Over the past two years, most dealers have had to tackle a myriad of unprecedented challenges. In September 2008, following the Lehman Brothers collapse, sales completely seized up, and they stayed that way through early 2009 (due to fear of the economy and a lack of lending from banks that were in financial peril). This sales meltdown led to stockpiles of inventories, followed closely by the Chrysler

Over the past two years, most dealers have had to tackle a myriad of unprecedented challenges.

In September 2008, following the Lehman Brothers collapse, sales completely seized up, and they stayed that way through early 2009 (due to fear of the economy and a lack of lending from banks that were in financial peril).

This sales meltdown led to stockpiles of inventories, followed closely by the Chrysler and General Motors dealership terminations (not to mention stores that simply closed during this same period).

After these historic events, dealers had to confront both the success and the inefficiencies of Cash for Clunkers. Closing out 2009 and through the beginning of 2010 we began to see a stabilization of the economy and marginal increases in sales volume — until this summer.

That's when new concerns about the economy resurfaced and sales once again began to stagger. Fortunately, this time manufacturers, dealers and banks are on more solid footing and are better prepared to handle the slowdown.

For the past few months, many dealers have settled into what they are considering to be the “new normal.” This is generally characterized by a vehicle retail sales environment of approximately 11 million units annually, not the 15 million, 16 million and even 17 million unit years we had grown accustomed to not long ago.

This “new normal” has forced most dealers into reevaluating every component of their operations in an effort to maximize efficiency and profitability. While most operators are experiencing steep declines in unit sales, many are experiencing increased profitability. That is due to:

  • Consolidation and elimination of dealer points.
  • Increased inventory management.
  • Higher transactional gross profits.
  • Lower flooring rates.
  • Leaner workforces.
  • Tighter expense management.

The combination of these factors has allowed dealers to sustain viable operations despite the fact that total annual sales in the U.S. are at their lowest level in 20 years.

While at the beginning of the year many dealer were hopeful that sales would rebound at a pace similar to the declined experienced at the end of 2008 (a V shaped recovery), the overwhelming consensus now is the recovery will be a slow climb out where we don't anticipate annual sales to exceed 14 million units for another three to five years.

So for most dealers, the focus in the coming months and possibly years is to continue to operate as efficiently and profitably as possible.

However, in the coming year, one of the greatest risks to dealers will likely come not from external elements (economy, government, manufactures, consumers, banks), but rather from forces within the dealership, specifically employees.

With unemployment rates at nearly 10% nationwide, a quarter of all home owners owing more than their house is actually worth, and an economy that continues to sputter, the financial pressure on many households is more than many individuals can handle.

Unfortunately for individuals facing financial difficulty, the weight of these pressures can often force them to act in manners that are irrational, even criminal. While employee theft has always been an ugly part of our business, it always seems to get uglier during tough economic times. The most confounding aspect of most thefts carried out by employees is that these individuals often don't see what they are doing as wrong or as a crime; rather, they rationalize their acts.

Unlike thefts that occur at major corporations that seem to be less personal (due to of the large number of employees), thefts within dealerships are both an emotional and financial betrayal.

Dealerships as a whole are composed of a close-knit group of employees; the average store will have less than 75 employees, most of whom will know each other on a first name basis.

And time and time again, it seems the individual who perpetrates an embezzlement is one of the dealerships most trusted, likely because they have worked at the dealership for several years, know the inner working and are friendly with the management or the owners of the store.

What makes dealerships particularly vulnerable is that unlike typical businesses that are single faceted, dealerships are an amalgamation of various business units. These various business units merge into a single accounting office, adding complexities in personnel training and internal controls that single faceted businesses simply do not have to confront.

Additionally, the high revenues, cash flows and volume of transactions of an average dealership provide a multitude of opportunities to those looking to take advantage of the system.

What makes matters worse is that in times like these, when dealers are looking to run the dealership as efficiently as possible, one of the first places they go to cut expenses is with accounting office personnel; many dealers see the accounting office as pure overhead expense.

Unfortunately what many dealers don't realize is that these short-term savings many cost them dearly in the long run.

Ultimately, a combination of risk factors tends to present themselves in dealership accounting offices where staff is cut too far back. When these accounting offices are too lightly staffed or staffed with low-cost or under-trained individuals, the following items begin to manifest themselves:

  • Delays and incorrect posting begin to occur.
  • Transactions, accounts and schedules are not reviewed or reconciled with either the detail or frequency that is necessary.
  • Receivable and payables begin to age out.
  • Reporting is not as timely or as useful due to accounting not being able to keep up.
  • Short cuts are taken or key internal control steps are skipped to speed up work.
  • Accounting records lack the clarity or conciseness needed to establish the appropriateness of transactions.

Once one of more of these factors occurs, a new set of risks can set the dealership on a path to unnecessary losses or embezzlement.

Weakness in the accounting department and the lack of monitoring of internal controls generate the ideal opportunity for long-term employees who have either grown disgruntled or are experiencing financial hardship to turn to embezzlement.

Having spent a good portion of my career conducting dealership internal audits and forensic fraud investigations, I have certainly become a cynic, and so I believe that there is always at least one employee at every dealership taking advantage of weaknesses in internal controls for their own personal enrichment. In some cases, the abuse may be small, but as we have seen in the headlines, it may be extensive, and it can cost dealers hundreds of thousands of dollars.

So, as dealers settle in to what we expect to be the “new normal” and climb out of the economic funk, they should be sure that all those hard-fought profits made in the font-end are not taken away on the back-end by someone taking advantage of the system.

My primary advice to dealers is this: Be careful not to fall for the easy savings of cutting the accounting department, because the long-term expense could be more than you imagine.

Trust me when I tell you that the cost of uncollected receivables, filing penalties or interest on late payments, write-offs due to posting errors, impaired management decision due to lack of accurate or timely reporting, improperly processed payroll, and undetected embezzlement will cost you exponentially more in the long run than cost cutting a $12-14 an hour employee in the accounting office.

Phil Villegas is a Principal at Dealer Transactional Services, LLC. (an affiliate of Morrison, Brown, Argiz & Farra, LLP) in Miami, Florida. He can be reached at [email protected] or 305-318-8515.

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