How to Perfectly Manage Your Cash Flow as an Auto Dealership

How to Perfectly Manage Your Cash Flow as an Auto Dealership

I grew up in the car business. My grandfather had GM, Oldsmobile, Chevrolet, and Ford dealerships. Then Cadillac, GMC trucks, and Chrysler dealerships joined the roster under my dad's watch. I worked in almost every department of my family's dealerships, but eventually, I gravitated toward the accounting office. I became my dad's controller, and that's where I discovered the importance of purchase orders (POs).

I'll never forget the day my dad came back from a large meeting and reported that everyone at the meeting was complaining about business expenses being out of control. Then, he had me create fictitious invoices from our parts department and send them to all the group members. Every member sent us a check to pay the phony invoice for which they had not received any goods or services.

How did they miss that detail? The group members believed that they were controlling expenses by signing every check personally. That's right; these successful business owners were trying to keep all their expenditures straight with no approval process. Of course, my dad handed the checks back at the next meeting, but not without a speech advocating for the use of PO systems in their businesses. 

Mission not accomplished

I've been inside more than 1,000 dealerships during my career in the industry. I worked with all shapes and sizes, and I can say that the experiment my dad did years ago would probably still work today. I'd wager that about two-thirds of dealerships are paying for items or services that are not legit. There are only a few dealerships making effective use of a PO system. 

When I use the term "effective PO system," I mean using a PO for every single expenditure. Dealerships are most likely using POs in the parts department, but rarely are they issuing them before work is done on vehicles in the sales department. In the back office at the same dealership, they most certainly are allowing people to go out to big-box stores and spend money with no approval. The lack of consistency in using PO systems can seriously cost a business.

What gives?

Hand signing the checks is still the prevailing method of attempting to control costs. It's no more effective today than it was thirty years ago. In today's environment, not using an automated purchase order system keeps dealerships from implementing other digitization initiatives, including digitizing payments. Dealers will implement technology in the variable and fixed operations but rarely update technology in the back accounting office. 

The "this is the way we've always done it" mindset infects every industry, and auto dealerships are not immune. Most automotive retail dealers typically come up through sales as it's the most common path to leadership in an automotive dealership. There are also academies that train them in other profitable areas of the dealership. Unfortunately, the accounting department is typically not income-producing, so it doesn't get as much attention.  

Goodbye to the mess

There are two ways to increase revenue in a dealership: Sell more and spend less. With online-only dealerships nipping at our heels, we have to question the way we've always done everything. If we want to compete with online dealerships, we have to optimize spending. 

An automated PO system saves time. It's not an extra step-- it's work handled on the front-end rather than the back end of the payment process. 

If you do the extra step of coordinating purchase orders at the beginning of your outgoing payments process, you can have greater control over expenditures. The first step in implementing a PO system is to set the vendor up and validate that they're a real and valid business. That one added element can help stop fraud. It likely would have prevented people from paying our fake invoices.

End-to-end digitization

I recently talked with a mid-size dealership that told me that six different people touched each check before it was mailed out. This list included the executive who finally signed the check. Think about that for a second. Six different people handled one vendor payment.  

Now think about this same payment if it was all done with technology. If the original invoice expenditure was set up with an electronic purchase order by a valid dealership employee, the dealer would already know that this was an approved payment without signing a check. The AP clerk could then schedule the payment and send it for electronic approval without chasing five other people before mailing it.  

With POs and payments automated, you can refocus the six people touching that check on another initiative. There are many other things people could do if they weren't busy doing those manual paper processes, like fine-tuning cash management or negotiating better contracts.

It's more apparent than ever that the auto dealership of the future will not be one where people are pushing paper. Using PO systems and getting rid of checks is not a new idea, but it's been surprisingly slow to catch on. All it takes is someone who sees the vision for the future. If you can focus your organization on the result, you don't have to have a passion for purchase orders; you just need a passion for progress.

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