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What Should My Controller Be Doing?

calculator-plusThat is a question that arises frequently in NCM 20 group discussions. To answer completely would take several articles; however, the first and most important answer to that question is, “Monthly reconciliation of your Balance Sheet accounts.”

Your Balance Sheet, the front page of your operating statement, shows accounts listed as either Current Assets or Current Liabilities as well as Long Term versions of Assets and Liabilities. The Current portions should be supported with documentation that supports the balances they contain, thus verifying each account’s accuracy. There is no reason you should not have a schedule to verify accuracy or timeliness of each of these accounts. Monthly reconciliation of each account may require you to physically touch each asset or you settle it with a simple reconciliation form.

Following is a quick checklist of Current Assets and Liabilities that should be corroborated at the end of the month.

CASH – Starting at the top, everyone should reconcile their Bank statements monthly. For internal control purposes the dealer should physically receive the statement and the reconciliation should be done by someone other than the person making deposits and writing checks. Currently many clients perform a daily reconciliation using “positive pay” and a download from their bank. Using a schedule, you can quickly see which checks have cleared and if there are any problems with deposits.

CONTRACTS IN TRANSIT – As a scheduled account, this should be easy – Either the contracts have been sent for collection or they are still in the office. Can you verify where each contract is? Are there any contracts over seven days old? Do you log any returned contracts?

VEHICLE & FACTORY RECEIVABLES – These schedules are aged for a reason!  Are there amounts due that are so old as to be uncollectible? Even though this account is scheduled, your assets may be inaccurately stated if they contain uncollectible balances. Is there documentation on all balances?

SERVICE, PARTS & BODY SHOP RECEIVABLES – Do you have separate accounts for each Department so the Managers can track and collect their responsibilities? Are past due receivables being reviewed and a reserved set up for their potential un-collectability? The ONLY Body Shop Receivables should be from Insurance Companies with which you have a DRP or Pro Shop Agreement!  All other Customers need to pay by Cash or Credit Card BEFORE Release! If you do write-off a balance in a vendor’s account, do you keep track of that amount? Consider a zero-balance schedule, controlled by the vendor number and the offset control number is the year written off or Department written off against.

WARRANTY/SERVICE CONTRACT RECEIVABLES – A warranty schedule will help you quickly review this account. Do you have any claims with an outstanding balance where only partial payments were made? What about the remainder? Are there claims over 30 days? Can they all be supported and justified?

HOLDBACK RECEIVABLES – Again, as a scheduled account this should be easy. Depending on when the holdback payment is due the balance will fluctuate, but there should never be any holdback receivable older than the last payment. Since the factory pays you by VIN, shouldn’t this schedule be controlled by VIN? Is yours controlled by stock number?

FINANCE RESERVES RECEIVABLES – Side-by-side schedules are useful when you have numerous finance sources. This of course implies that you have a separate GL account for each finance source that pays you a reserve, and you should. If your bank notifies you about the reserve amount when the deal is funded, adjustments should be made at that time by the appropriate office personnel, not F & I staff. Shortages/overages should be reviewed with the Finance Manager to determine why the difference between bank and book.

VEHICLE INVENTORIES – Are both new and used inventories verified by physically touching each vehicle?  No cheating by handing the manager a list. They should start with a blank sheet of paper and list each stock number as they come to the vehicle. Also, this is the perfect time to verify that all proper labels are affixed. Do you verify for each vehicle on the inventory schedule that you either have for new inventory a MSO/CSO, or for used inventory a title or copy of a current payoff check? Are Dealer Exchanges/Trades in inventory floored? See Floorplan Notes Payable below.

PARTS, TIRES AND ACCESSORIES – Here, a schedule won’t do, so utilize a monthly reconciliation form to track variances. Your Parts Management Report will never reflect the same balance as the General Ledger. There are too many variables – work-in-process, parts returns, un-posted invoices, etc.  To account for the variance each month complete a reconciliation form. If you need a form, please call the NCM Institute at 866.756.2620. Use your system’s management reports to track aging or inactive inventory.  A low days supply may not necessarily mean your inventory is clean and usable. What about your Special Order parts bins, are they filling up?

SUBLET INVENTORY – The schedule should be compared to your Open Repair Order report. Any discrepancy should be handled immediately. If you have credit balances, determine why you are not receiving or posting the vendor’s invoices on a timely basis.

WORK IN PROCESS –  This account can either be scheduled and compared to the Open Repair Order report, with variances being researched and adjusted, or a simple reconciliation form can be completed and variances researched and written off, with the Manager’s approval. The Service Open R.O. list should be reviewed weekly with no R.O. over three days without explanation, none over five days without “family history.” In Body Shop, five days, two weeks. A Work-in-Process schedule is recommended if you frequently have to write off large balances and it cannot be determined what is causing the discrepancy.

BODY SHOP MATERIALS – A physical of the Body Shop Materials should be done on a monthly basis by the Manager. To reconcile to the General Ledger Balance you must estimate the material used on Open Repair Orders, add that to the physical balance and reconcile the number to the General Ledger Balance.

PREPAID EXPENSES – Documentation should always be available to corroborate the balance in these accounts. Only those expenses where the benefit extends over more than one month should be set up in this account.

FIXED ASSETS – Annually, you should physically inventory your capital assets to verify the equipment/furniture is still in use and can be accounted for.

ACCOUNTS PAYABLE – All debit balances on this schedule should be researched. One useful way of monitoring this schedule is not to post current month’s invoices until you’ve paid most vendors. When the schedule only has a few balances from the previous month it is easy to spot irregularities.

FLOORPLAN NOTES PAYABLE – This account should be on a side-by-side schedule with the appropriate inventory. Any time there is a balance in one column and not the other, the discrepancy must be researched. Either you have unfloored inventory or a floorplan payoff has been missed.

MISC. PAYABLES – Tag, Vehicle Payoffs, Service Contracts, etc. should all be scheduled, current and verifiable.

TAXES – All taxes should be sufficient to cover the liabilities and paid in a timely manner. Verify by comparing any return or payments to the month end balance.

ACCRUED PAYROLL – This account should reflect payroll due for unpaid time at the end of the month and is usually reversed at the beginning of the next month. Accruals for monthly commissions should have documentation to confirm the appropriate amount is being accrued.

Verifying all Balance Sheet Accounts involves cooperation from all departments and should be taken seriously every month. Dealers and managers often do not grasp the significance of the balances in these accounts. The question we should be asking ourselves when we see a balance in an account is, “Is that a reasonable number?”

One last thing, does your CFO prepare for you each month a Cash Flow Statement? In Accounting classes this goes by several names such as Sources and Uses of Cash. It is a report that verifies the change in your cash balance for an accounting period by showing you where cash was used or cash was generated as it shows you the changes in the balances of the accounts on your balance sheet.

Historically there has been little training in the understanding of not only the Balance Sheet, but the rest of the operating statement itself. NCM holds Principles of Financial Analysis training where all of these accounts and topics are covered. Click or call the NCM Institute for more information at 866.756.2620.


About the author

Scott Norman

Scott Norman

Scott Norman began his career in the automobile business at a Kansas City area Ford Dealer Development dealership. He came to NCM Associates, Inc. in February 1988 after 15 years in the retail automobile business, where he held positions as Controller, and Parts and Service Director. During his retail years he was also an independent consultant, specializing in accounting and fixed operations and as an instructor for the Chrysler Marketing Institute. Today, Scott works with both dealer and manager 20 Groups. With his background in accounting, fixed operations and training, he brings a unique combination of operational experience and analytical skills to his clients.

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