Automotive Dealership

Automotive Dealership
Accounting Principles

Purposes of Accounting
Monitor Financial Health Evaluate Operating Controls Provide Planning Information Overview of Seminar: Importance of Business Dealership Management in defining the control of dealership activities to insure that they fall within acceptable guidelines. Successful entrepreneurs use business management as a tool and an essential element in any decision making process. Application of Business and Financial Management Practices to the context of the automotive dealership. This seminar connects the principles of accounting and finance management to the unique setting of the automotive dealership.

Evaluate Operating Controls
Via Financial Statements Dealer Income Statements Dealer Balance Sheets Via Analytical Feedback Financial Ratios Versus Established Goals Operating Controls business practices, policies and procedures, and business processes. Accounting acts as a measurement of the effectiveness of the dealership’s operating history. Financial Statements provide information about the historical performance of investments and business operations. Analytical Feedback is the process of using accounting information to compare business and financial performance against industry performance standards and dealership expectations.

Provide Planning Information
Benchmarks for Employees and Managers Periodic Analysis Correction of Out-of-Line Conditions Accounting provides measurements of progress of managers and employees, as well as providing a foundation for future planning. It is the responsibility of dealership managers to ensure that accounting performance measurements are relevant to current and future business processes and needs. Financial information, as the result of business operations, is often the first indicator of potential problems with dealership systems.

Basic Accounting Equation
Assets = The “Things” A Business Owns Liabilities = The People A Business Owes Net Worth = The Net Value of a Business (Owner’s Equity)

Double Entry System T-Account Format Debits Credits
In a double entry system debits and credits are used to record business transactions. For every debit there must be a credit and vice versa and the books are “in balance” when debits recorded are equal to credits. In a T-Account Format each account is assumed to have the structure of a “T” with debits on the left hand side and credits on the right. Debits in a T-Account system are used to increase the value of asset accounts, decrease the value of liabilities, decrease net worth accounts. Credits in a T-Account system are used to decrease the value of asset accounts, increase the value of liabilities, and increase the value of net worth accounts.

T-Account Format Assets and Debits on Left
Liabilities and Credits on Right Firm Net Worth on Lower Right

T-Account/Double Entry Basics
Each transaction impacts Asset, Liability or Net Worth account balance Assets, Liabilities, and Net Worth must increase or decrease equally

Transaction: New Car Sale with Cash Deposit
Debit Cash Credit Customer Deposits Transaction Scenario: Customer places factory order for new vehicle, leaving a cash deposit of $1500 Debit: Cash $ (Reflects the addition to dealership’s cash) Credit: Customer Deposits $ (Reflects dealership’s obligation to customer)

Transaction: Dealership Purchases Vehicle from Factory
Debit Inventory, New Vehicles Credit Wholesale Finance Liability, New Vehicles Transaction Scenario: Dealership purchased and received vehicle from factory Debit: Inventory-New Vehicles $ (Reflects increase in new vehicle inventory) 65A Advertising Expense (Reflects charge to dealership for factory advertising) Factory Receivables (Reflects factory holdback amount) Credit: Notes Payable-New Vehicles and Demos $ (Reflects increase in dealership liability-floor plan) Note: Some dealerships do not expense advertising, but consider the advertising a component of vehicle cost.

Transaction: Sale of Vehicle on Conditional Sales Contract
Debits Contracts in Transit Customer Deposit Due from Financing Institution Inventory-Used Vehicles Credits Sales, New Vehicles Accrued Sales Tax Accrued License and Title Finance and Insurance Income Transaction Scenario: Customer buys car on a conditional sales contract Debits: Contracts in Transit (Reflects increase in finance contracts in transit to finance company) Customer Deposits (Decreases dealership’s liability for the customer’s deposit) Due from Finance Institution (Increases finance reserve) Inventory-Used Vehicles (Reflects an increase in used vehicle inventory) Credits: Sales-New Vehicles (Reflects sale of new vehicle) Accrued Sales Tax (Reflects increase in sales tax liability) Accrued License & Title (Reflects increase in obligation to pay license and title fees) Finance and Insurance Income (Reflects increase in finance and insurance income)

Transaction: Sale of Vehicle on Conditional Sales Contract
Overallowance Illustration Vehicle Selling Price Trade Value (Actual Trade Value: 6000) Dealer Overallowance Two Methods for handling overallowance Handling Overallowance: Method #1: Reduce selling price of new vehicle and record the net amount in the appropriate new vehicle sales account. (This method used in above example) Method #2: Record the overallowance by debiting the appropriate sales account using a separate account in the general journal.

Transaction: Sale of Vehicle
Debits Cost of Sales Credits Vehicle Inventory Transaction Scenario: Dealership makes payment for vehicle in inventory Debits: Cost of Sales-New Vehicles (Reflects cost of new vehicle) Credits: Inventory-New Vehicles (Reflects decrease in new vehicle inventory)

Transaction: Account for Sales Tax and License Fees
Debits Accrued Sales Taxes Accrued License and Title Tax Credits Cash Transaction Scenario: Dealership pays sales tax, license, and title fees associated with vehicle sale. Debit: Accrued Sales Tax Accrued License & Title (Reflects decreased liabilities for sales tax, license, and title fees collected from customer) Credit: Cash (Reflects decrease in cash)

Transaction: Settle Finance Liability on New Car
Debit Wholesale Finance Liability, New Vehicles Credit Cash Transaction Scenario: Dealership pays off new vehicle to finance company Debits: Notes Payable-New Vehicle and Demos (Decreases floor plan liability) Credits: Cash (Reflects decrease in cash)

Transaction: Dealership Reconditions Vehicle- In Process
Debit Work in Process-Parts Work in Process-Mechanical Credit Inventory-Parts Accrued Payroll Transaction Scenario: Dealership accounts for in-process reconditioning of trade-in vehicle Parts Department Procedures: Parts issued to service technicians recorded on work order (Reflects cost of parts used for reconditioning) Inventory-Parts (Relieves parts inventory control pad for parts issued to technicians) General Ledger Entry: (Internal Labor Sale) Debits: Work in Process-Mechanical (Reflects cost of work in process labor) Credits: Accrued Payroll (Reflects technician’s time for reconditioning labor)

Transaction: Dealership Reconditions Vehicle-Close R.O.
Debit Inventory, Used Vehicles Cost of Sales, Labor, Internal Credit Sales-Labor- Internal Inventory, Work in Process, Labor Transaction Scenario: Dealership closes R.O. for labor used to recondition trade-in vehicle (Internal Sale) Debits: Inventory - Used Vehicles (Reflects increase in inventory value of used car) Credits: Sales-Labor Internal (Reflects the sale of reconditioning labor performed) (Cost of Sale) Cost of Sales-Labor Internal (Reflects cost of internal labor) Inventory-Work in Process Labor (Reflects closing of R.O. for all technician’s mechanical labor used in reconditioning vehicle)

Transaction: Dealership Reconditions Vehicle-Close R.O.
Debit Inventory, Used Vehicles Cost of Sales-Parts Credit Sales-Parts-Internal Work in Process-Parts Transaction Scenario: Dealership closes R.O. to recondition trade-in vehicle (Internal Sale) Debits: Inventory-Used Vehicles (Reflects increase in Work in Process-Parts account balance) Credits: Sales-Parts-Internal (Reflects decrease in parts inventory) (Cost of Sale) Cost of Sales-Internal Parts (Reflects increase in cost of internal parts sales) Inventory - Parts (Relieves parts inventory for parts used in reconditioning vehicle)

Transaction: Reconditioned Vehicle Sold for Cash
Debits Cash Sales Cost of Sale, Used Reconditioning, Used Vehicles Credits Sales, Used Vehicles, Retail Accrued Sales Tax Accrued License and Title Tax Inventory, Used Vehicles Transaction Scenario: Reconditioned trade-in vehicle is sold for cash Sale Debits: Cash Sales (Reflects increase in cash from vehicle sale) Credits: Sales-Used Vehicles-Retail (Accounts for sale of used vehicle at retail) Accrued Sales Tax Accrued License & Title (Reflects liability for sales tax, license, and title fees) Cost of Sales Cost of Sale-Used Vehicle-Retail Reconditioning-Used Vehicles (Reflects cost of used vehicle sold) Inventory-Used Vehicles (Reflects decrease in used vehicle inventory)

Transaction: Used Vehicle Delivery
Debits Cash on Hand Credits Cash Sales Transaction Scenario: Dealership receives cash for used vehicle sold Debits: Cash on Hand (Reflects increase in cash) Credits: Cash Sales (Decreases the cash sales clearing account) Accounting Note: It is correct to consider the sale of the new vehicle and the sale of the used vehicle two transactions for accounting purposes. However, many dealerships consider the “flow” of the sale of the new vehicle through the used vehicle(s) as one transaction to “wash” out the new and used inventory for unit sales purposes.

Transaction: Labor Sale to Customer (Open Account)
Debits Customer Accounts Receivable Cost of Sales, Customer Labor Credits Sales, Customer Labor Inventory, Work in Process, Labor Transaction Scenario: Dealer sold mechanical labor on a repair order, accepting an approved customer account receivable in payment. Sale Debits: Customer Accounts Receivable (Reflects increase in customer accounts receivable) Credits: Sales-Customer Labor (Reflects amount of labor sold on customer’s repair order) Cost of Sales Cost of Sales-Customer Labor (Reflects cost of customer labor performed) Inventory-Work in Process Labor (Reflects the compensation paid for productive labor sold and relief of inventory account.)

Transaction: Warranty Work Performed
Debits Factory Claims Cost of Sales, Warranty Claims, Labor Cost of Sales, Warranty Claims, Parts Credits Sales, Warranty Claims, Labor Sales, Warranty Claims, Parts Inventory, Work in Process, Labor Inventory, Parts Transaction Scenario: Dealership performs warranty work on new vehicle. Sale Debits: Factory Claims (Reflects an increase in factory receivables) Credits: Sales-Warranty Claims-Labor Sales-Warranty Claims-Parts (Reflects the detailed sales price of warranty labor and parts) Cost of Sales Cost of Sales-Warranty Claims-Labor Cost of Sales-Warranty Claims-Parts (Reflects detailed cost of warranty labor and parts) Inventory-Work in Process-Labor Inventory-Parts (Reflects relief of labor inventory and decrease in parts inventory)

Transaction: Credit Received from Factory for Warranty Work
Debits Accounts Payable-Factory Credits Factory Claims Transaction Scenario: Factory settles approved warranty claim via electronic transfer Debits: Accounts Payable-Factory (Reflects an decrease in factory payable) Credits: Factory Claims (Reflects a decrease in factory claims receivable)

Transaction: Parts Purchase on Open Account
Debits Inventory, Parts Credits Accounts Payable Transaction Scenario: Dealership purchases parts on open account from wholesaler Debits: Inventory-Parts (Reflects increase in parts inventory) Credits: Accounts Payable (Reflects increase in accounts payable) Alternative Transaction Scenario: Dealership purchases parts on open account from factory Inventory-Parts Discounts & Allowances Accounts Payable (Reflects purchase discount of , stock order allowance of 94.15)

Transaction: Payment for Parts Purchased on Open Account
Debits Accounts Payable Credits Cash Cash Discount Earned Transaction Scenario: Dealership pays for parts purchased on open account (within cash discount period) Debits: Debit Accounts Payable-Trade Creditors (Reflects decrease in accounts payable) Credits: Cash Cash Discount Earned (Reflects decrease in cash and cash discount earned for payment of bill within specified time)

Transaction: Parts Sold on Open Account
Debits Customer Accounts Receivable Cost of Sales, Parts, Wholesale Credits Sales, Parts, Wholesale Inventory, Parts Transaction Scenario: Dealership sold parts to an independent garage, accepting an approved account receivable. Sale Debits: Customer Receivable (Reflects an increase in customer accounts receivable) Credits: Sales-Parts-Wholesale (Reflects the sale of parts wholesale) Cost of Sales Cost of Sales-Parts-Wholesale (Reflects cost of part sold) Inventory-Parts (Decreases inventories-parts)

Dealership Balance Sheet
Snapshot of Dealership’s Financial Status Captures Dealership’s Historical Financial Performance The Balance Sheet is a snapshot of dealership performance in that it is generated on a specific date and time and describes the dealership’s financial status at that time. It is a static document.

Balance Sheet Components
Asset Accounts Liability Accounts Net Worth Accounts Asset Accounts are listed on the Balance Sheet from most to least liquid. Their balance is a measure of the value of the asset they describe. Asset Accounts are subdivided into groups of: Current, Fixed, and Other. Current Assets can be converted into cash within a 12 month cycle. Liability Accounts are listed on the Balance Sheet in two groups, Current Liabilities and Long-Term Debt Current Liabilities are payable within one year of the date of the Balance Sheet Long-Term Debt are obligations that are not due within a year. Net Worth Accounts represent owner’s equity as of the date of the statement.

Current Assets: Cash Cash on Hand Cash in Bank Contracts in Transit
Cash on Hand includes undeposited receipts and petty cash used for change, to pay small bills not conveniently paid by check. Cash in Bank amount of cash on deposit in: Cash deposits Savings deposits Time deposits Certificate of Deposits All interest from above deposits Contracts in Transit amount due the dealership from vehicle sale retail finance contracts which have been signed by the customer and submitted to finance institutions but for which the dealership has not yet received funds.

Current Assets: Receivables
Total of Accounts Receivable Sum of Notes Receivable-Customer, Accounts Receivable-Customer, less Allowance for Doubtful Accounts The Receivables balance is a combination of: Notes Receivable Including unpaid balances of notes accepted from customers Customer Accounts Receivable, Including customer charge sales, deposited checks returned by the bank, lease payments due on leases recorded as sales, repossession surpluses

Current Assets: Inventories
Vehicle Related Demonstrators New Cars and New Trucks Used Cars and Used Trucks Other Automotive For inventory purposes, valued at cost Vehicle Related inventories include: Cost, for new vehicles, is made up of: Factory invoice less holdback and other nonrelated items, such as supplemental advertising funds, plus dealer prep, delivery, and dealer installed options charges (parts and labor). Demonstrators--Includes cost of new vehicles set aside as demonstrator units or for temporary company service New Cars--Cost of new units in inventory plus cost of new units transferred from demonstrator and temporary company service New Trucks--Cost of new trucks and motor homes in inventory Used Cars/Used Trucks & Motorhomes--Inventory value of units intended for resale (Lower of trade-in allowance or appraised wholesale), cost of auction-purchased units, internal labor and materials used in reconditioning, traveling expenditures to acquire used cars, auction fees, appraised wholesale value of repossessed cars. Other Automotive--inventory value of other automotive items in inventory, regularly stocked for resale, including all new and used self-propelled vehicles: aircraft, boats, camper bodies, farm tractors, golf carts, motorcycles, scooters, snowmobiles, special bodies, truck equipment and trailers, utility house and camper trailers (valued by same method as used cars

Current Assets: Inventories (LIFO)
Last-in-First-Out Inventory Valuation Method LIFO (Last In First Out): Method of determining inventory valuation by which newest purchases in inventory are used in cost of sales calculations. Used for new and used vehicles, parts and accessories. In times of inflation, LIFO effectively decreases accounting profits and tax liabilities. Dealerships using LIFO as an inventory valuation method should set up separate general ledger accounts to reflect LIFO adjustments to original inventory costs. Each manufacturer displays inventory valuations on financial statements, generally in an inventory analysis section. On the template statement included, the inventory analysis section appears on the financial statement, Page 4.

Parts and Mechanical Department Related Parts and Accessories Tires Gas, Oil, and Grease Parts and Mechanical Department Related inventories include: Parts and Accessories--total inventory value of automotive parts and accessories in stock Inventory value is the cost of new parts and accessories acquired, other than those purchased with new vehicles, less purchase discounts earned, plus replacement value of accessories and optional equipment removed from new vehicles and place into inventory, inventory value returned by customers, and adjustments for differences between book and physical count values. Tires--inventory value of tires available for sale Cost of tires acquired, other than those purchased on new vehicles, replacement value of tires removed from new units and placed in new inventory, and adjustment for differences between book and physical account values. Gas Oil and Grease--value of gasoline, oil, grease, and similar materials. Value is the cost of purchasing those materials, and adjustments for difference between book and physical count values.

Parts and Mechanical Department Related (Continued) Paint and Body Shop Materials Sublet Repairs Work in Process Labor Other Miscellaneous Assets Received in Trade Paint and Body Shop Materials--includes value of paint and body shop materials, including undercoating and trim materials Value is the cost of paint and body shop materials purchased, less adjustments for differences between book and physical count values. Sublet--includes cost of sublet repairs unsold (sublet repairs means mechanical work assigned to specialty shops, outside garages, etc.) Work in Process Labor--cost of labor on repair orders in process Cost is made up of: Compensation of Technicians and helpers for work performed on jobs not yet completed, including reconditioning and PDI work, amount of compensation for mechanical department manager, foremen, or any other employees not classified as Technicians, for any portion of their time devoted to productive mechanical work.. Other--inventory value of regularly stocked merchandise, intended for resale, not otherwise provided for, which could include appliances, farm implements, hardware, and motors Value is cost of other items purchased, replacement value of items removed from new vehicles and placed in inventory. Miscellaneous Assets Received in Trade--inventory value of assets received on vehicle sales which are intended for resale, which could include grain, jewelry, livestock, and real estate Valued at lower of appraised value or trade-in value

Current Assets: Cash Equivalents
Securities Factory Receivables Due from Finance Companies Securities include all marketable, unpledged securities currently owned by the dealership. Book value of stocks, bond, and other securities, which are readily marketable, and held as temporary investments. Factory Receivables includes the amount due from the factory for new vehicle holdback, incentives and rebates, new vehicle inspection labor claims and fuel fill claims. Due from Finance Companies includes unpaid finance income and any money withheld on discounted customer contracts due from finance institutions. Is usually indicated on the check to the dealer and on the note of acceptance.

Current Assets: Cash Equivalents
Warranty Claims Insurance Commissions Receivable Prepaid Expenses Taxes Insurance Other Warranty Claims includes unpaid warranty and transportation claims due from factory. Should be an adjustment between the month-end schedule and the account balance. Insurance Commissions Receivable includes unpaid insurance commissions due from insurance companies. Prepaid Expenses Taxes--includes unexpired portion of taxes paid in advance Insurance--includes unexpired portion of insurance premiums paid in advance Other--includes unexpired portion of other expenses of the business paid in advance, such as advertising and rent.

Current Assets: Total Equals Total of Cash Receivables Inventories Cash Equivalents Current Assets, Total, is the total of all assets owned by the dealership which can readily be turned into cash within 12 months of the date of the Balance Sheet.

Working Assets Driver Training Vehicles Lease and Rental Units
Lease and Rental Accumulated Depreciation Working Assets bear some of the characteristics of both current and long-term assets and may include lease and rental vehicles and drivers’ training vehicles. Driver Training Vehicles--includes the cost of vehicles temporarily registered in driver’s training programs. Cost is invoice, less holdback, plus internal selling price of installed accessories, parts, and labor, designation and delivery expense and labor and materials used in rustproof or polish. Lease and Rental Units--includes the book values of lease and rental units. Book Value is the internal selling price of units purchased from dealership or other dealerships and placed in lease and rental service, recorded as depreciable assets, plus the internal selling price of dealer installed special equipment, modifications, etc. and the labor required for that installation. The value of working assets is generally depreciated at a consistent rate, usually approximately 2% per month.

Current Assets + Working Assets
= Total Current and Working Assets

Fixed Assets Land Buildings Equipment Accumulated Depreciation
Accounting Value for Land equals the cost value of land used for the dealership business only Building and Improvements includes the cost of buildings and improvements situated on land owned and used for the dealership business only. Machinery and Shop Equipment includes cost of machinery, permanent tools and equipment acquired for the Mechanical Department, moveable items such as benches, cabinets, hoists, overhead racks, shelves, and tool racks. Parts and Accessory Equipment includes cost of equipment acquired for use in the Parts and Accessories Department, moveable items such as cabinets, containers, counters, parts bins, shelves, and showcases. Furniture and Fixtures includes the cost of furniture and fixtures acquired for the business, including chairs, data processing equipment, desks, file cabinets, moveable partitions, office machines, signs, rugs, tables, safes, and telephone equipment. Company Vehicles includes the cost of vehicles set aside for permanent company use, such as antique vehicles, delivery vehicles, racing vehicles, courtesy vehicles, motorcycles, and tow trucks. (Cost is the cost of product plus the cost of any modifications) Leaseholds includes the cost of any improvements on existing buildings, new buildings, and/or paving, etc. Depreciation is the periodic, systematic reduction in the value of a working or fixed asset, usually as a percentage of its original cost. Accumulated Depreciation is a contra asset account used to total the past depreciation expense taken against a working or fixed asset

Other Assets Life Insurance-Cash Values
Notes and Accts. Receivable- Officers Notes and Accts. Receivable- Others Other Investments and Miscellaneous Assets Life Insurance Cash Value includes the cash surrender value of life insurance policy owned by the dealership. Notes and Accounts Receivable-Officers includes notes and accounts due from active and inactive officers and stockholders Notes and Accounts Receivable-Other includes Receivables for which no provisions have been made, such as loans or advances made to all employees, excluding current balances, loans to subsidiary and affiliated enterprises, and loans or advances made to outsiders. Other Investments and Miscellaneous Assets includes the book value of assets not used in the business and not otherwise provided for, such as cost of securities acquired as long-term investments, cost of securities not readily marketed, cost of real estate not used in the dealership’s operation, cost of club memberships, cost of miscellaneous assets not intended for resale, cost of investment in subsidiary or affiliated enterprises, adjustments for net profit or loss of subsidiary or affiliated enterprises whose net equity is recorded in this account, cost of investment in purchasing cooperatives, capitalized amount of organizational expenses, performance guarantee deposits on contracts, any prepaid expenses on these assets, and cost of other assets acquired. Goodwill, or the potential selling value of the enterprise over and above its accounting value, is listed among other assets.

Total Assets Equals: Total Cash and Contracts + Total Receivables
+ Total Inventory + Working Assets + Fixed Assets + Other Assets

Current Liabilities Accounts and Notes Accruals
Current Liabilities are obligations the dealership expects to settle within 12 months of the Balance Sheet date.

Current Liabilities: Accounts and Notes
Accounts Payable Notes Payable Credit Balances and Deposits Accounts Payable includes the net balance of obligations to trade creditors, such as purchases on open accounts, liens due on used vehicles acquired, balances due on repossessed vehicles, and payments collected from customers for transmittal to others. Accounts Receivable Credit Balances includes any receivables that are not customer receivables. Example: Washout accounts for wholesale parts trading. Customer Deposits include any deposits taken for new or used vehicles not yet delivered. Warranty Claims Advance includes the amount advanced by the manufacturer for unpaid warranty claims. Notes Payable-New Vehicle and Demonstrator includes the amount owed to financial institutions on the floor plan secured by new vehicles and demonstrators in inventory. (Also by new vehicles sold for which delayed payments have been authorized) Notes Payable-Lease and Rental Units includes the amount owed to financial institutions on notes secured by lease and rental units. Notes Payable-Other includes the amount owed on floor plan secured by used vehicles, driver’s training, and permanent company vehicles. (Also notes on assets not otherwise provided for.)

Current Liabilities: Accruals
Interest Payable Wage-Related Payables Insurance Payable Taxes & Other Payables Interest Payable includes unpaid interest which has accumulated on all interest-bearing obligations. Salaries, Wages, and Commissions Payable includes unpaid salaries, wages, and commissions earned by employees. Insurance Payable includes earned insurance premiums which have not been paid or applied against advance deposits. Payroll Taxes Payable includes unpaid payroll taxes. Sales Taxes Payable includes unpaid sales and use taxes. Other Taxes Payable includes unpaid taxes other than payroll, sales, use and income taxes (provision for state and local taxes payable not based on income). Income Taxes Payable includes unpaid federal, state, and local income taxes. Employee Bonuses Payable includes unpaid employee bonuses Owner’s Bonuses Payable includes unpaid owner’s bonuses Pension Fund Payable includes unpaid contributions to an employee’s pension fund (both employer and employee contributions are included) Other Payables includes other payable and accrued expenses for items such as charitable contributions, inventory services, legal and auditing fees, rent, and dividends.

Long-Term Liabilities
Long-Term Debt Mortgages Payable, Real Estate Long Term Debt includes obligations not due within 12 months of current operating statement date and not secured by real estate or vehicles. Mortgages Payable-Real Estate includes obligations not due within 12 months of the current operating statement date and secured by real estate

Total Current Liabilities + Total Long-Term Liabilities
Total Liabilities = Total Current Liabilities + Total Long-Term Liabilities

Net Working Capital Formula:
Total Current & Working Assets + Qualified Loans to Dealership + Accumulated LIFO Write-Down - Total Current Liabilities & Long-Term Debt Net Working Capital measures the dealership’s ability to finance business operations into the future. Each manufacturer establishes its owns guidelines for its dealers; however, in general the dealership should have available: 30 days of expenses 30 days supply of used cars 30 days of factory and warranty receivables 1.5 months supply of parts inventory Sufficient customer receivables (determined by factory formula)

Net Worth Capital Stock & Additional Paid-In Capital Retained Earnings
Net Profit or Loss, Year to Date Capital Stock and Additional Paid-in Capital includes par and assigned value of capital stock and additional paid-in capital. Retained Earnings includes retained profits accumulated in prior years in an incorporated business. Dividends includes dividends declared during the current year Investments includes investments and retained profits accumulated in prior years in an unincorporated business. Drawings include unpaid salaries to proprietor and partners Net Profit or Loss Year to Date is derived directly from the normal operations of the dealership (from sales, lease and rental units, and all additions to and deductions from income) to date in statement year.

Dealership Income Statement
Measures Dealership Profit and Loss Performance for a Given Time Period Compiled from Individual Department Profit and Loss Performance The Dealership Income Statement (Profit and Loss Statement) measures the dealership’s success in terms of profit and loss for a specific time period. It compiles a record of the performance of all of the departments in the dealership.

Income Statement Components
Total Revenue - Cost of Sales Gross Profit - Expenses Net Income

Total Revenue Total Sales for all Departments New Vehicle Used Vehicle
Service Parts Body Shop Finance and Insurance

Cost of Sales Variable Department Parts Department
New and Used Vehicles Finance and Insurance Parts Department Mechanical Department & Body Shop New and Used Vehicle Department Cost of Sales Cost of Vehicle Finance and Insurance Cost of Sales Cost of Warranties Cost of Credit Life and Accident and Health Parts Department Cost of Sales Cost of Parts - Purchase Allowances and Inventory Adjustments Mechanical Department and Body Shop Cost of Sales Labor Cost (Mechanical Department and Body Shop)

Gross Profit Calculation
Net Sales - Cost of Sales = Gross Profit Gross Profit is profit earned from revenue-producing activities, after subtracting cost of sales, but before subtracting expenses, interest, and taxes. Net Sales includes sales revenue excluding sales and use taxes and after all returns, discounts, and all other allowances.

Dealership Expenses Variable Expenses Personnel Expenses
Semi-Fixed Expenses Fixed Expenses Variable Expenses are those operating expenses directly related to vehicle sales and leasing and which tend to vary in direct proportion to volume. Personnel Expenses are wages and benefit expenses for dealership employees (excludes compensation paid to vehicle and F&I sales personnel and direct cost of mechanical labor sales). Semi-fixed Expenses are those operating expenses which vary with but not in direct proportion to sales volume. Fixed Expenses are those expenses which remain almost unchanged from month to month.

Variable Expenses Expenses which rise and fall with business activity
Primarily new and used vehicle selling expenses

Variable Expenses Consist of: Vehicle Sales Persons’ Compensation
Delivery Expense Policy Work, New and Used Vehicles New and Used Vehicle Sales Personnel Compensation Determined by Dealership Compensation Plan May include incentives Fees paid to outsiders for vehicle sales *Balanced compensation plan addresses both dealership objectives and needs of sales personnel. Delivery Expense To prepare vehicles for final delivery Over and above factory inspection procedures Cost of removing options from new vehicles Gasoline for used vehicles sold Travel expenses for employees delivering vehicles Policy Work Vehicle adjustments to satisfy customers Warranty claims rejected by manufacturer

Personnel Expense Salaries Owner Supervision Clerical
Other Salaries and Wages Salaries: Owner--Compensation to active and inactive owners Supervision--Compensation of supervisory personnel May include incentives for departmental performance Clerical--Compensation of all clerical personnel Secretaries, bookkeepers, cashiers, telephone operators, inventory, warranty, and billing clerks Other Salaries and Wages--Compensation of active employees not covered by specific accounts. Mechanical department advisors, janitors, porters and lot attendants, parts helpers, counterpeople, truck drivers, security guards, used vehicle appraisers, buyers and delivery people, maintenance personnel, courtesy car and van drivers, helpers.

Personnel Expenses Absentee Compensation Taxes, Payroll
Employee Benefits Pension Plans Absentee Compensation--compensation for employees not available for work. Includes: Holiday, Vacation, Sick leave, attending training schools. Taxes, Payroll--expense for employer’s share of payroll taxes Includes: FICA, state and federal unemployment Employee Benefits--expense for contributions to employee benefit plans. Includes: Group life insurance, hospitalization, health and accident insurance, laundry and coverall and uniform service, workman’s compensation insurance Pension Funds--expense for dealership contributions to employee pension plans

Semi-Fixed Expenses Used Vehicle Maintenance Expense
Company Vehicle Expense Office Supplies and Expenses Other Supplies Used Vehicle Maintenance Expense--cost to keep used vehicle inventory in salable condition, after reconditioning. Includes: Recharging batteries, repairing tires, washing, recleaning and polishing Company Vehicle Expense--cost to operate and maintain new and used demonstrators and company vehicles. Includes: Expense to reimburse employees for business use of personal vehicles, payroll deduction to employees for use of demo (acts as reduction to this account). Office Supplies and Expenses--cost of all stationery, forms, and computer and office supplies, and postage not used for direct mail advertising. Other Supplies--cost of all supplies other than office supplies Includes: Small tools, solvents, rags, janitorial supplies, light bulbs, expendable materials for mechanical department, parts cleaning materials.

Semi-Fixed Expenses Advertising Contributions
Policy Work, Parts and Service Outside Services, Data Processing Advertising--expense of advertising Includes: Advertising billed to factory vehicle invoices, media advertising, direct mail (including postage), telephone directory, sponsorship of teams, free lubricants, window posters, handout brochures, road signs, auto signs, banners and streamers, promotional items (i.e. keyrings and novelties). Note: For some manufacturers, advertising charged to a vehicle is assigned as a variable expense, while advertising such as dealership image advertising is assigned as a semi-fixed expense. Contributions--expense for donations and contributions religious, charitable, and educational groups. Policy Work, Parts and Service--expense of repairing, adjusting and replacing mechanical work and parts and accessories sold, for which neither customer nor manufacturer will be charged. Also includes reduction or adjustment to parts and labor invoices made for customer satisfaction. Outside Services, Data Processing--expenses for outside data processing services

Semi-Fixed Expenses Outside Services, Other Travel and Entertainment
Membership, Dues, and Publications Legal and Audit Expenses Outside Services, Other--all outside services, except data processing Includes: Protection services, refuse removal, physical inventory, janitorial service, credit card company fees, collection agencies, consultant fees, management fees, bank service charges, window washing, snow removal, credit reports, warranty claims preparation service. Travel and Entertainment--expense of travel and entertainment for business purposes, other than acquiring vehicles and attending training schools. Includes: Transportation, lodging, and meals Membership, Dues, and Publications--expense for membership in and dues of organizations for business purposes, and of subscriptions to magazines, newspapers, and other publications. Includes: Dealer association dues, parts price and merchandising catalogs Legal and Audit Expenses--expense for legal and auditing services. Includes: Attorney retainer fees, public accountant charges, and court costs and fees

Semi-Fixed Expenses Telephone Expense Training Expense
Interest-Notes Payable and Other Miscellaneous Expenses Telephone Expense--expense of telephone services Includes: Basic phone service, toll calls, fax Training Expense--expense for training dealership personnel Includes: Tuition, training materials, meals, lodging, and transportation for training. Interest-Notes Payable and Other--Net expense for interest on new and used vehicles, demonstrators and company vehicles, tax delinquencies and other notes payable, not secured by real estate, mortgages, or lease or rental units. (Interest credits received from factory reduce this expense) Miscellaneous Expenses--expense for miscellaneous items. Includes: Shipping charges for parts, advertising for help, dealership and departmental meetings, gifts, auction registration fees, repairing vehicles damaged by employees.

Fixed Expenses Rent Amortization-Leaseholds Repairs-Real Estate
Rent--rent for real used in business operations Includes: Tax, insurance paid as part of rental agreement; includes new vehicle storage lot rental (subletting income from premises (parts department, body shop, etc.) reduces this account). Amortization-Leaseholds--amortizes cost of leasehold improvements, normally over the term of the lease or the useful life of improvements. Repairs-Real Estate--expense of repairing real estate, owned or leased, associated with business operations. (Major repairs to the facility may be capitalized; dealership’s tax advisor should be contacted)

Fixed Expenses Depreciation-Buildings and Improvements
Taxes-Real Estate Insurance-Buildings and Improvements Depreciation-Buildings and Improvements--provision for depreciation of buildings and improvements. Taxes-Real Estate--expense for taxes on land and building owned by the dealership and used in the business (taxes paid on rental property should be charged to “Rent”). Insurance-Building and Improvements--expense for insurance on real estate and improvements used in business (insurance paid on rental property should be charged to “Rent”)

Fixed Expenses Interest-Mortgages Heat, Light, Power, and Water
Insurance-Other Taxes-Other Interest-Mortgages--expense for interest on real estate mortgages Heat, Light, Power, and Water--expense for utilities used in the operation of the dealership. Includes: Heat, gas, electricity, water, etc. Insurance-Other--expense for than real estate, improvements, lease and rental units, and worker’s comp. Includes: Comprehensive garage liability; umbrella coverage; business interruption and liability; building contents; fidelity bond; company owned vehicles; valuable papers and records. Taxes-Other--expense for taxes and licenses, such as personal property taxes, capital stock and franchise taxes not based on income, use taxes, business licenses, gross receipt taxes, tags for company owned vehicles, other than lease and rental units, sales people’s licenses.

Fixed Expenses Repairs-Equipment Depreciation-Equipment
Equipment Rental Repairs-Equipment--expense for maintaining and repairing equipment other than company owned vehicles Depreciation-Equipment--expense for depreciation of machinery and shop equipment, furniture and fixtures, parts and accessories equipment, company vehicles (other than lease and rental units) Equipment Rental--expense of renting equipment, other than lease and rental units Includes: Dealership identification signs, and charges by lease and rental units provided to customers at no charge.

Total Fixed Overhead Total of: Personnel Expenses Semi-Fixed Expenses
Used to calculate fixed absorption Total Fixed Overhead has the effect of accumulating all expenses, minus variable selling expenses.

Profit or Loss Calculations
Operating Profit or Loss Gross Profit - Total Expenses Net Profit or Loss Net Additions or Deductions Operating Profit or Loss is derived directly from normal operation of the dealership, before the application of Additions to Income, Deductions from Income, Bonuses, and Income Taxes. Additions to Income are monies or credits received by the dealership which are either not part of a departmental sale or income, or are not relevant to the accounting period of the statement. Typically includes interest earned, discounts earned by prompt payment of Accounts Payable, and bad debts recovered. Deductions from Income are monies spent or not received as agreed which are not allocated to any particular department or are not relevant to the accounting period of the statement. Typically includes items such as interest on loans and reserve to cover an adjustment for doubtful accounts allowance.

Net Additions and Deductions
Adjustments for Doubtful Accounts Other Deductions Adjustments for Doubtful Accounts--provision for bad debts expense on uncollectible customer receivables Other Deductions--miscellaneous deductions such as LIFO inventory adjustments, life insurance premiums on lives of owners, losses on sales of fixed assets, securities, other investments, and miscellaneous assets, casualty losses, write-down of securities to market value, moving expenses, write-off of organizational costs and fees paid others for arranging capital loans, mortgage, and other Repossessions Losses-New and Used Vehicles--losses on repossession of previously sold new or used vehicles

Net Profit or Loss After Income Taxes and Bonuses
Employees Owners Income Taxes, Current Year Bonuses: Employees--compensation to employees over and above agreed-upon compensation, including spontaneous payment of bonuses. Owners--compensation to owners in addition to their agreed-upon compensation, including spontaneous payment of bonuses. Income Taxes: Provision for taxes paid on income for the current year. Any income taxes applicable to prior years should be shown in retained earnings.

Dealership Profit Centers
All revenue-producing departments are considered separate businesses All revenues and expenses incurred by each department must be distributed or allocated to the various departments within the dealership. Proper assignment of revenues and expenses allows for an accurate picture of departmental performance.

Each department is credited with revenue for its activities. Each department is charged with expenses directly associated with its activities. Each department has its own sales, cost of sales, and gross profit accounts. Allocating such items to departments is easily done. New vehicle cost of sales: New Vehicles Used vehicle cost of sales: Used Vehicles Mechanical and body shop cost of sales: Technician wages Parts department cost of sales: Cost of parts Each department has its own accounts for direct expenses. Those expenses are charged directly to that department. This allows for better departmental control over its direct expenses. Examples: Commission paid for new vehicle sale: Direct to New Vehicle Department, Commissions Advertising for used vehicles: Direct to Used Vehicle Department, Advertising Any expense item entirely direct in nature, though applicable to more than one operating department, should be pro-rated to those departments on an equitable basis.

General and Administrative Expenses
General and Administrative Expenses benefit most or all departments. They must be appropriately charged to individual departments. General and Administrative Expenses are expenses of a general or indirect nature which are not directly charged to one or more operating departments. (Benefit several or all departments) (Example: Basic telephone service, owner’s salary). They are charged to the General and Administrative account, from which they are pro-rated to the operating department in a ratio tailored to the individual dealership. Several methods of allocating General and Administrative Expenses have been developed, using factors including departmental gross profit, square footage, personnel expenses, or percentage of fixed operating expenses in that department. Generally, the more fixed overhead a department has, the more general and administrative expenses charged to that department. However, each dealership chooses and generates its own formula.

Tests each department’s ability to stand on its own and its contribution to the overall organization When general and administrative expenses are properly spread, an accurate picture of each department’s profitability emerges. The resulting information identifies profitable and unprofitable departments. Note: Limitations of Profit Centering: An unprofitable department may or may not indicate a problem in that specific department. A financial manager should be cautious about evaluating operational problems in isolation from overall organizational interactions. Problems that impact departmental profit performance may originate in other departments.

Profit Center Statements
Separate Profit and Loss Statements are generated for each department: New Vehicles Used Vehicles Lease and Rental Mechanical Body Shop Parts and Accessories Note: Review profit center limitations

DOC Statement Daily Operating Controls
Day-by-Day Performance Against Monthly Forecast Formatted in Working Days Only Generated Every Day (Before Work Starts) Reviews Key Variables for Management Control The Daily Operating Control (D.O.C.) statement is a report intended to keep dealership managers informed as to their daily progress toward sales, profit, expenses, and inventory goals. Note: Each dealership determines the actual components of its own D.O.C. The components offered here commonly appear on D.O.C. statements, but are offered as examples.

DOC Statement Contents
Departmental Performance for: New and Used Vehicles Parts and Accessories Mechanical & Body Shop Finance and Insurance Departmental Compilations Business Operations DOC Departmental DOC statements provide department managers information about units and dollars sales, gross profit, and expenses Department Compilations compile all revenues from each department along with a subtraction of all fixed overhead expenses, to give a daily profit or loss picture. Business Operations DOC gives a picture of dealership liquidity.

DOC: New and Used Vehicles
Unit Sales Car Truck Gross Profit Variable Expenses Commissions Accrued

DOC: Mechanical and Body Shop
Sales Customer Warranty Internal Gross Profit

DOC: Mechanical and Body Shop
Retail Repair Orders Generated Retail Labor per RO Retail Parts per RO

DOC: Parts and Accessories
Retail Sales Sales Gross Profit Warranty Internal Parts Transfer In some dealerships, part of gross profit for parts department is split with mechanical. This item shows the parts manager how much of the gross is subject to split with mechanical.

DOC: Finance and Insurance
Gross Profit Departmental Gross Profit Gross Profit per Contract Percentages of Penetration Credit Life Accident and Health Warranty In percentage of penetration, important information includes: Number of warranties sold through manufacturers versus other, possibly more profitable, providers. Notes: In some dealerships, Credit Life, Accident and Health, and Warranty Contracts can be divided among different vendors. In that case, the percentage of penetration of each vendor should be tracked. The Finance and Insurance D.O.C. should also track amounts of monthly chargebacks.

Fixed Overhead Expenses
Personnel Expense Pay Plans Budgeted Salary Costs Semi-Fixed Expenses Budgeted Accounts Fixed Expenses Spread Daily Personnel Expenses Pay plans of managers should be calculated and spread per working day to estimate daily cost Hourly and salaried and other employees should be spread per working day to estimate daily cost. Semi-Fixed Expense These expenses should be forecast at the start of each month and should be spread per working day to estimate daily cost. Fixed Expense These expenses should be calculated from previous months’ histories and spread per working day to estimate daily cost.

Departmental Compilation DOC
New and Used Vehicle Gross Profit, less Variable Costs Parts and Accessories Gross Profit Mechanical and Body Shop Gross Profit Finance and Insurance Gross Profit Total Dealership Gross Profit Less Fixed Overhead Expenses

Business Operations DOC
Total Cash on Hand Liquid Assets Cash in Bank Accounts Accounts Receivable Contracts in Transit Receivables, Parts and Service Factory Receivables Warranty and Rebates These accounts are listed in the order of their liquidity. Total Cash on Hand--cash on premises Cash in Bank Accounts--any cash included in bank balances Accounts Receivable Contracts in Transit--review with F&I manager to insure accuracy (How many are 10 days old?) Receivables, Parts & Service--review daily to insure collectibility Factory Receivables--one person should collect both warranties and rebates. Factory Receivables should be tracked via a transaction log. (Reviewed monthly)

Business Operations DOC
Finance Contracts Outstanding Reserve Vehicle Equity Used Inventory Net New Vehicle Equity Reserve is the amount of money due to the dealership from bank financing transactions. Vehicle Equity Used vehicles once per month should be evaluated against wholesale book value to judge the amount of equity available via their quick sale. Net New Car Equity Should be a negative number, which alerts office manager of new vehicles which have not been floor planned.

Month-End Checklist Enter all documents for month in appropriate journals Create journal entries Accruals Work in Process Preliminary Schedules Physical Inventory of New and Used Vehicles Controller Responsibilities--end of month: 1.) Set and communicate to department heads a month-end cut off date 2.) Take physical inventories of new and used vehicles 3.) Find and settle all old documents from all departments 4.) Make weekly and flag payroll accrual entry 5.) Obtain month-end computerized parts management reports and review with dealer. 6.) Reconcile work in process (mechanical and body shop departments), sublet, paint and material, and gas, oil, and grease inventories with general ledger and make adjustments. 7.) Complete posting of vehicle deals and clean vehicle schedules 8.) Make accrual entries for expenses incurred but unbilled at month end (Advertising, Floor plan interest)

Month-End Checklist Create Journal Entries
Tax Deposits by month end Review General Journal entries to insure balance Finalize all Accounts and Run Trial Balance Review Statement for errors Print final Statement (closes month) Controller Responsibilities--end of month (Continued): 9.) First day after end of month, all parts, mechanical, body shop tickets should be posted as well as payables. 10.) Make entries to reserve aged receivables and warranties. 11.) Make standard entries and reconcile prepaid accounts. 12.) Reconcile factory open accounts 13.) Run trial balance for use in calculating any monthly bonuses 14.) Accrue bonuses and income taxes 15.) Run monthly schedules, journals, and reports; review and clean schedules 16.) Input memo information for monthly financial statement 17.) Prepare monthly and quarterly tax reports and submit

Month End Checklist Statement must be completed on a timely basis
Distribute as needed Dealer Principal Complete Financial Results Dealership General Manager All Department Income Statements Department Heads Department Income Statements Controller Responsibilities--end of month (Continued) 18.) Run statement and transmit to factory 19.) Distribute statement to appropriate dealership managers 20.) Prepare and submit insurance reports if required 21.) Prepare and distribute parts purchase list by distributor and expense analysis 22.) Reconcile all Balance Sheet accounts 23.) Reconcile bank accounts, finance reserve, and chargebacks to dealership.

Monitoring Financial Health
ROI Measures Return on Investment Traditional ROI Formula: Net Income / Owner’s Equity ROI (Return on Investment) measures the return an organization or an entrepreneur realizes on the investment made in an enterprise. ROI = Net Profit After Taxes Initial Investment + Retained Earnings ROI Example: Net Profit After Taxes = 192,989 Capital Investment & Retained Earnings = 457,272 ROI = / = 42.2%

Monitoring Financial Health
GMROI: Gross Margin Return on Investment Measures by Gross Margin and Inventory (Investment) Turns Formula: Gross Margin x Inventory Turns Formula Goal: 150% GMROI (Gross Margin Return on Investment) measures the importance of inventory turns to dealership profitability. GMROI illustrates the importance of the balance between inventory turns and gross profit on sales. GMROI Example from Statement: New Vehicles: 61 New Vehicles in stock YTDS 481 Units (Retail) GMROI Calculation for New Vehicle Sales: 481 / 12 = 40 (Sales per Month) 61 / 40 = (Current Inventory / Sales per Month) 1.525 x 30 = (Days’ Supply of Inventory) 360 / = 7.9 (Inventory Turns per Year) 7.9 x 10.5 = GMROI (10.5% = Gross for New Vehicle Sales) GMROI for Parts Sales: 3.75 Inventory Turns per Year 25.8% gross for parts department 3.75 x 25.8 = GMROI

Expense Control Formula
Importance of Expense Control: To Dealership Net Profit $ expense / return on sales % = sales coverage needed Example: $1 exp. / 2% return = $50 coverage Importance of Dealership Expense Control: Average Dealership Net Profit is % of Net Sales Application of Dealership Expense Control Formula: At 2% Return on Net Sales, $50 sales needed to cover $1 expenses ($16 sales needed to cover one $.32 postage stamp)

Fixed Absorption Total Gross Profit of: Mechanical Department
Body Shop Parts Department Divided by: Total Fixed Overhead Fixed Absorption is calculated by taking: Total Fixed Gross / Fixed Overhead Expense Fixed Absorption example from statement: Total Fixed Gross = Fixed Overhead Expense = / = 62.5% In this case, the Fixed Gross has covered 62.5% of the total dealership’s Fixed Overhead Expenses. (In most dealerships, a rate of fixed absorption above 60% is considered healthy.) Higher fixed absorption ratios promote profitability (or survival) during downturns in vehicle sales. Note: Fixed absorption for Ford dealers: the sum of total parts, mechanical, and body shop gross profit divided by the sum of total fixed expenses plus dealer’s salary, plus parts, mechanical, and body shop sales expenses. For Toyota dealers: gross profit from mechanical, body shop, and parts department divided unabsorbed expenses minus new and used sales compensation, supervision compensation and F&I commissions

Dealership Cash Management
Cash management is the key to long-term dealership viability Dealerships tend to experience volatile cash balances Manufacturers’ policies drive cash considerations

Manufacturer Cash Management Requirements
Cash On Hand Requirements Inventory Requirements Accounts Receivable Requirements Cash On Hand Requirements: Equivalent of one month’s expected operating expenses, plus average of total technician’s payrolls Inventory Requirements: Inventory of used vehicles--dealership should be capitalized to fund used vehicle inventory without resorting to borrowed funds. Recommendation: Keep 30 days’ supply of vehicles in dollars and in units (used vehicles should be valued on today’s books to insure their sale will not sacrifice profits) Inventory of parts--should be kept below two month’s supply at cost in dollars. Weekly stock orders and efficient delivery systems insure adequacy of two-month’s supply at 85% fill-rate Work in Process--labor and sublet repairs should reflect anticipated customer charges Accounts Receivable Requirements: Accounts Receivable, Vehicles--any vehicle delivery made without complete funding (i.e. “spot” deliveries) should be monitored carefully. Accounts Receivable, Parts and Service--primarily used for wholesale and commercial accounts (i.e. insurance companies, fleet accounts, etc.). Requires careful monitoring to keep under 30 days aging. Factory Receivables--warranty claims, rebates (to customers, to dealers, sales contest earnings). Should be paid within 30 days

Manufacturer Cash Management Requirements
Prepaid Expenses Fixed Assets Other Assets Prepaid Expenses: Prepayments should be evaluated in light of potential savings. Include: Insurance, taxes, rent, special advertising, etc. Fixed Assets: Should be budgeted and planned in advance to assure sufficient cash availability and efficient use. Include: Major tools and equipment for mechanical and body shops, computers, parts bins, office equipment, furniture and fixtures. Other Assets: Reinvested profits. After initial capitalization, most of the increase in cash comes from the profitability of the dealership. Internally generated cash: Performing work internally, especially used car reconditioning, instead of outsourcing tends to conserve cash. Cash creation: In times of crisis, dealerships can generate substantial sums of cash by: floor planning new vehicles not already floor-planned, liquidating used car inventory, accelerate collection or borrow against accounts receivable, delaying payment of bills (by working with suppliers), or recapitalization.

Cash Management Policies
Dealership cash situation should be reviewed with top management daily Key accounts: Accounts Receivable Factory Receivables Cash on Hand Inventories

Days Supply of Cash Average Total Expenses Per Month
Customer Deposits and Taxes Payable Net Cash

Net Cash Cash on Hand, End of Month Total Cash and Contracts
Less Cash in Bank Credit Balance To calculate Net Cash Assets (Statement Page 1) Cash on Hand (Pg. 1, Line 7) Cash in Bank (Pg. 1, Line 8) Contracts in Transit (Pg. 1, Line 9) Equals: Total Cash and Contracts (Pg. 1, Line 10) Liability (Statement Page 1) Cash in Bank Credit Balance (Pg. 1, Line 7) Total Cash and Contracts Less Cash in Bank Credit Balance Equals Net Cash Example from Statement Cash on Hand $ Cash in Bank Contracts in Transit Total Cash in Bank Credit Balance Net Cash Equals $

Average Monthly Expenses
YTD Total Expenses, Less YTD Amortization, Leaseholds YTD Depreciation, Buildings and Improvements YTD Depreciation, Equipment Total Divided by Number of Months in Statement To calculate Average Monthly Expenses: YTD Total Expenses (Statement Pg. 1, Line 52) YTD Amortization, Leaseholds (Pg. 1, Line 37) YTD Depreciation, Buildings and Improvements (Pg. 1, Line 39) YTD Depreciation, Equipment (Pg. 1, Line 48) Example from Statement: YTD Total Expenses $ YTD Amortization, Leaseholds YTD Dep., Bldgs & Imprvmts YTD Dep., Equipment Total $ Total Divided by Total Months in Statement (12) Yields Average Monthly Expenses: $ / 12 = $

Deposits and Taxes Payable
Total of the following accounts: Customer Deposits Payroll Taxes Payable Sales Taxes Payable Other Taxes Payable To Calculate Deposits and Taxes Payable: Liabilities (Statement Page 1) Customer Deposits (Pg. 1, Line 10) Payroll Taxes Payable (Pg. 1, Line 20) Sales Taxes Payable (Pg. 1, Line 21) Other Taxes Payable (Pg. 1, Line 22) Example from Statement: Customer Deposits $ Payroll Taxes Payable Sales Taxes Payable Other Taxes Payable Total

Days Supply Cash Formula
Net Cash Divided by the Total of: Average Monthly Expenses Customer Deposits and Taxes Payable Multiply Above Total By 30 for Days Supply To calculate Days Supply-Cash: Divide Net Cash by (Average Monthly Expenses + Customer Deposits and Taxes Payable) x 30 Example from Statement Net Cash: Divided by: ( ) / = 1.25 To calculate days supply of cash: 1.25 x 30 = 37.5 days supply A 30 day supply of cash is the goal for many dealerships. 15 days supply is considered acceptable

Where did the cash go? Used Car Inventory Parts Inventory
Less Floor Plan Parts Inventory Factory Receivables Warranty Receivables Prepaid Expenses Accounts Receivable Fixed Assets Where did the cash go? Account Month End Month Beg. Difference Used Car Inventory Less Floor Plan Parts Inventory Factory Receivables Warranty Receivables Prepaid Expenses Accounts Payable Fixed Assets

Where did the cash go? Purchase activities related to fixed assets
Net Change in Non-Cash Accounts Net Income or Loss Where does the cash go? 1. Used vehicles over 60 days - 2. Parts over 90 days supply - 3. Warranty receivables over 30 days - 4. Prepaid expenses - 5. Accounts Receivable over 60 days - 6. Fixed Assets -

Ratio Calculation Exercise
The remainder of this workbook is devoted to financial ratios, which can be calculated from the workshop financial statement. The ratios reflect the profitability, debt, and liquidity status of the dealership

YTD Net Profit After Taxes & Bonuses
NET PROFIT MARGIN (Return on Net Sales) Net Profit / Net Sales YTD Net Profit After Taxes & Bonuses Page No. Line No. NET PROFIT MARGIN (Return on Net Sales) Net Profit / Net Sales YTD Net Profit After Taxes & Bonuses Page No. 1A Line No. 60 Divided by: Net Sales YTD Page No. 1A Line No. 1 Equals: Net Return on Sales Divided by: Net Sales YTD Page No. Line No. Equals: Net Return on Sales

NET PROFIT MARGIN (Return on Net Sales) Net Profit / Net Sales YTD Net Profit After Taxes & Bonuses Page No. 1A Line No. 60 Divided by: Net Sales YTD Page No. 1A Line No. 1 Equals: Net Return on Sales

PERCENT RETURN ON INVESTMENT
Net Profit / Equity Net Profit After Taxes YTD Page No. Line No. Divided by the Sum of: Common Stock Retained Earnings Equals: Percent Return on Investment PERCENT RETURN ON INVESTMENT Net Profit / Equity Net Profit Before Taxes YTD Page No. 1 Line No. 58 Divided by the Sum of: Common Stock Page No. 1 Line No. 45 Retained Earnings Page No. 1 Line No. 48 Equals: Percent Return on Investment

PERCENT RETURN ON INVESTMENT
Net Profit / Equity Net Profit After Taxes YTD Page No. 1 Line No. 58 Divided by the Sum of: Common Stock 45 Retained Earnings 48 Equals: Percent Return on Investment

GROSS PROFIT AS A % OF SALES
Gross Profit / YTD Net Sales YTD Gross Profits Page No. 1A Line No. 2 Divided by: YTD Net Sales Page No. 1A Line No. 1 Equals: Gross Profit as a % of Sales

ACID RATIO (SLIDE 1) (Quick Ratio) Total Current Assets Less Inv & Prepaids / Total Current Liabilities - Notes Payable N.V. Total Current Assets Page No. 1 Line No. 38 Less Sum of: Total Inventories Page No. 1 Line No. 28 Total Prepaids Page No. 1 Line No. 35,36,37 Equals Current Assets - Inventories & Prepaids

ACID RATIO (SLIDE 1) (Quick Ratio) Total Current Assets Less Inv & Prepaids / Total Current Liabilities - Notes Payable N.V. Total Current Assets Page No. 1 Line No. 38 (+p.4, l.58 LIFO Adjustment) Less Sum of: Total Inventories 4 58 Total Prepaids 35,36,37 Equals Current Assets - Inventories & Prepaids

ACID RATIO (SLIDE 2) Current Liabilities Page No. 1 Line No. 28 Less: Notes Payable, New Vehicles Page No. 1 Line No. 12 Equals Current Liabilities - Notes Payable, New Vehicles Equals: Acid Ratio Total Current Assets Less Inv & Prepaids / Total Current Liabilities - Notes Payable N.V.

DEBT TO ASSETS Total Debt / Total Assets Total Liabilities Page No. 1 Line No. 38 Divided by Total Assets Page No. 1 Line No. 60 Equals Debt to Assets

DEBT TO ASSETS Total Debt / Total Assets Total Liabilities Page No. 1 Line No. 38 Divided by Total Assets 60 (+p.4, l.58, LIFO Adjustment) Equals Debt to Assets

EXPENSES AS A % OF SALES Total Expenses / Total Sales Total Expenses, YTD Page No. 1A Line No. 52 Divided by: Total Sales, YTD Page No. 1A Line No. 1 Equals: Expenses as % of Sales

RECEIVABLES: MONTHS SUPPLY
MEHCANICAL, PARTS AND BODY SHOP YTD Chargeable Sales / 12 Mechanical, Parts and Body Shop Receivables Page No. 4 Line No. 49 Total Mechanical, Parts and Body Shop Sales, YTD Page No. 3 Line No. 59 Less Warranty and Internal Sales, YTD Page No. 3 Line No. 45,46 Equals: YTD Chargeable Sales Divide by 12 for Avg. Mo. Chargeable Sales

RECEIVABLES: MONTHS SUPPLY
MEHCANICAL, PARTS AND BODY SHOP YTD Chargeable Sales / 12 Mechanical, Parts and Body Shop Receivables Page No. 4 Line No. 49 Total Mechanical, Parts and Body Shop Sales, YTD Page No. 3 Line No. 59 Less Warranty and Internal Sales, YTD Plus Cash Sales, YTD Page No. 3-4 Line No. 24,25,26,35,35 45,46-55 Equals: YTD Chargeable Sales Divide by 12 for Avg. Mo. Chargeable Sales

WARRANTY RECEIVABLES: MONTHS SUPPLY
YTD Sales/ 12 Warranty Claims Page No. 1 Line No. 33 YTD Warranty Sales - Mechanical Labor Page No. 3 Line No. 24 YTD Warranty Sales - Parts Page No. 3 Line No. 45 YTD Warranty Sales - Body Shop Page No. 3 Line No. 35 T tl Sales Less Warranty Claims: YTD Total / # Stmt. Mo. = Month Avg. Sales Equals: Warranty Claims: Months Supply

WARRANTY RECEIVABLES: MONTHS SUPPLY
YTD Sales/ 12 Warranty Claims Page No. 1 Line No. 33 YTD Warranty Sales - Mechanical Labor 3 24 YTD Warranty Sales - Parts 45 YTD Warranty Sales - Body Shop 35 Ttl Sales Warranty Claims YTD Total / # Stmt. Mo. = Month Avg. Sales Equals: Warranty Claims: Months Supply

BASIC ASSETS AS A % OF CURRENT ASSETS
Basic Assets / Current and Working Assets Total Cash and Contracts Page No. 1 Line No. 10 Total Inventories Page No. 1 Line No. 28 Less: Cash in Bank-Credit Balance Page No. 1 Line No. 7 Total Basic Assets Total Current and Working Assets Page No. 1 Line No. 42 Equals: Basic Assets as a % of Current Assets

BASIC ASSETS AS A % OF CURRENT ASSETS
Basic Assets / Current and Working Assets Total Cash and Contracts Page No. 1 Line No. 10 Total Inventories Page No. 4 Line No. 58 Less: Cash in Bank-Credit Balance Page No. 1 Line No. 7 Total Basic Assets Total Current and Working Assets Page No. 1 Line No. 42 (+p.4, l.58 LIFO Reserve) Equals: Basic Assets as a % of Current Assets

USED VEHICLE INVENTORY DAYS SUPPLY (SLIDE 1)
No. of Used Cars Page No. 4 Line No. 53 No. of Used Trucks Page No. 4 Line No. 54 Total

USED VEHICLE INVENTORY DAYS SUPPLY (SLIDE 2)
YTDS Used Cars - Retail Page No. 3 Line No. 1 YTDS Used Trucks - Retail Page No. 3 Line No. 6 Total YTDS Total / No. Statement Months X 30 Equals Used Vehicle Inventory Days Supply

PARTS AND ACCESSORIES INVENTORY MONTHS SUPPLY
(SLIDE 1) Parts and Accessories Inventory Page No. 4 Line No. 56

PARTS AND ACCESSORIES INVENTORY MONTHS SUPPLY (SLIDE 2)
YTDS Total - Parts and Accessories Page No. 3 Line No. 53 Less: YTDGP - Parts and Accessories Page No. 3 Line No. 53 Plus: YTDGP - Wholesale Parts Compensation Page No. 3 Line No. 50 Plus: YTDGP - Stock Order Allowance Page No. 3 Line No. 51 Cost of Goods Sold

TOTAL DEBT TO NET WORTH Total Debt / Net Worth Total Liabilities Page No. 1 Line No. 38 Net Worth Page No. 1 Line No. 59 Equals: Total Debt to Net Worth

BREAKEVEN POINT -- New Unit Sales Needed to Cover Unabsorbed Overhead
Formula: Unabsorbed Overhead / Variable Net Profit per New Unit Sold 1.) Total Fixed Overhead YTD Page No. 1A Line No. 51 Mechanical Department Gross Profit YTD Page No. 3 Line No. 32 Parts and Accessories Department Gross Profit YTD Page No. 3 Line No. 53 Body Shop Department Gross Profit YTD Page No. 3 Line No. 43 2.) Total Fixed Gross Profit

3.) Unabsorbed Overhead (Net Burden or "Nut") (Total Fixed Overhead YTD - Total Fixed Gross Profit) New Vehicle Gross Profit YTD Page No. 3 Line No. 60 Used Vehicle Variable Gross Profit Page No. 3 Line No. 16 4.) Total Variable Gross Profit (New Vehicle + Used Vehicle Variable Gross Profit) Total Variable Selling Expenses, YTD Page No. 2 Line No. 8

5.) Variable Net Profit (Variable Gross Profit - Variable Selling Expenses) Number of New Units Sold YTD UNITS Page No. 3 Line No. 28 6.) Variable Net Profit per New Unit Sold (Variable Net Profit / Number of New Units Sold YTD) 7.) Breakeven for Year (Unabsorbed Overhead / Variable Net Profit per New Unit Sold) UNITS 8.) Breakeven for Month (Breakeven for Year / 12) UNITS

BREAKEVEN POINT - New and Used Vehicle Sales Needed to Cover Unabsorbed Fixed Overhead 1.) Fixed Overhead Expense YTD Page No. 1A Line No. 51 2.) Gross Profit Mechanical Department YTD Page No. 3 Line No. 32 3.) Gross Profit Parts and Accessories Department Page No. 3 Line No. 53 4.) Gross Profit Body Shop YTD Page No. 3 Line No. 43 5.) Total Fixed Operations Gross Profit

BREAKEVEN POINT - New and Used Vehicle Sales Needed to Cover Unabsorbed Fixed Overhead 6.) Unabsorbed Overhead (Net Burden or "Nut") (Fixed Overhead Expense - Fixed Operations Gross Profit) 7.) Average Month Net Burden (Unabsorbed Overhead / 12) 8.) YTD Gross Profit Per New Vehicle Page No. 3 Line No. 28 9.) PNVR Variable Selling Expenses YTD Page No. 2,3 Line No. 8,28 10.) Retained Gross (Variable Net) PNVR YTD (YTD Gross PNVR - PNVR Variable Selling Expenses YTD)

BREAKEVEN POINT - New and Used Vehicle Sales Needed to Cover Unabsorbed Fixed Overhead 6.) Unabsorbed Overhead (Net Burden or "Nut") (Fixed Overhead Expense - Fixed Operations Gross Profit) 7.) Average Month Net Burden (Unabsorbed Overhead / 12) 8.) YTD Gross Profit Per New Vehicle Page No. 3 Line No. 28 9.) PNVR Variable Selling Expenses YTD 2 8 10.) Retained Gross (Variable Net) PNVR YTD (YTD Gross PNVR - PNVR Variable Selling Expenses YTD)

BREAKEVEN POINT - New and Used Vehicle Sales Needed to Cover Unabsorbed Fixed Overhead 11.) YTD Gross Per Used Vehicle Retailed Page No. 3 Line No. 1 12.) YTD PUVR Variable Selling Expenses Page No. 2,3 Line No. 8,1 13.) Retained Gross (Variable Net) PUVR YTD (YTD Gross Per Used Vehicle Retailed - YTD PUVR Variable Selling Expenses)

BREAKEVEN POINT - New and Used Vehicle Sales Needed to Cover Unabsorbed Fixed Overhead 11.) YTD Gross Per Used Vehicle Retailed Page No. 3 Line No. 1 12.) YTD PUVR Variable Selling Expenses Page No. 2 Line No. 8 13.) Retained Gross (Variable Net) PUVR YTD (YTD Gross Per Used Vehicle Retailed - YTD PUVR Variable Selling Expenses)

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