Last week we talked about the importance of the balance sheet (you can catch up here). This week we’re talking about how to keep your balance sheet balanced by following 6 priceless accounting disciplines that I’ve used in my dealerships for over four decades.
If you don’t have any active disciplines around proving the balance sheet or have only a few, you’re going to love this article.
As with all new habits in life, start small and build overtime into a more sophisticated approach. Get comfortable, grab a coffee, and let’s dive into the 6 key disciplines that cannot be avoided if you want to ensure an accurate balance sheet:
- Count Parts Inventory at least twice a year, and adjust for shrinkage. This is easier if you perform a rolling stocktake. By this I mean count one sixth of your inventory every month in an organized sequence
- Overaged Parts Inventory should be written down or written off once hitting certain age parameters. The exact parameters are up to the Dealer, but there is so much evidence and data to suggest that parts older than 12 months since last purchase diminish exponentially in their potential for a retail sale. It is better to take small “hits” every month, rather than a massive one in five years time when someone performs a full audit.
- Over valued Used Units we all make errors in judgement on the value to place on a trade in, and the “pain” from having to write down a used unit cost does not diminish over time. There is a saying “your first loss is your smallest” which means the earlier you recognize it has to be written down, then the smaller the loss is. Every day that unit sits on your floor it is costing money and falling in value. Get the cost right, and someone will buy it.
- Overage debts, preferably you don’t run customer credit accounts, but if you do, eventually you will get “caught”, it is just a fact of life with credit. Establish your parameter whereby the time cost of chasing a debt is not worth what you recover. Write it off, book the loss and move on. If someone has not paid in 90 days, it is unlikely they are going to without some sort of “coercion”. Just be careful, don’t let pride get in the way, what is the cost of the coercion, and is it worth the monetary return?
- Creditors are not always right. If you have outstanding credit returns or incentive payments, deduct from what they say you “owe them”. Remember to recognize the debt to creditors as an accurate reflection of reality.
- Work in Progress, after parts inventory, is the second biggest “sleeper” on your balance sheet. It is easy to recognize a used unit that has been on your floor too long, you see it every day. However WIP and parts inventory are “hidden” . Be ruthless with Service WIP, ask questions, and have parameters to report against. How long is reasonable for a Service Order to stay open? There are so many local and industry specific variables that it is not realistic for me to suggest what your parameters are, but each Dealer should know what they are and enforce them.
Implementing these 6 key accounting disciplines at your dealership will help keep your balance sheet balanced, but these are just the start. There is so much more we can talk about another time; however, if you can nail down the above principles and get comfortable with your Balance Sheet, then we are off to a great start to a more sophisticated dive into managing your business’s financial health in future.
Remember it is critical to understand the balance sheet, what it is telling us and what activities need to be part of your regular routine to keep it healthy. Too many people think the balance sheet is the realm of their accountants, and leave it to them.