dealership - henderson hutcherson and mccullough€¦ · (b) captive insurance company. •...
TRANSCRIPT
DEALERSHIP INSIDER May 2014
WHY CHOOSE THE HHM AUTO GROUP?
We know that what sets apart a successful dealership from all of its competitors is its commitment to
service excellence. The HHM Auto Group seeks to provide the same level of service excellence to your
dealership that you provide to your customers. We pride ourselves on providing the following traditional
and non-traditional services to our clients:
HHM AUTO GROUP SERVICES
• Audit & Attest Services
• Tax Planning/Preparation
• Estate/Succession Planning
• LIFO Services
• Internal Control Reviews
• Business Valuations
• Cost Segregation Studies
• 401(k) Plan Services/Investments
• Litigation Support
• Educational Seminars
Non-Traditional Accounting ServicesTraditional Accounting Services
• Operational Reviews
• Expense Analysis & Control
• Floorplan Analysis
• Buy/Sell Structure & Negotiation
• Accounting Staff Training
• DMS Optimization
• Business Performance Analysis & Forecasting
• Financing Alternatives & Capital Analysis
• Reinsurance Company Alternatives/Structure
• Buy-Here/Pay-Here Consulting
• Related Finance Company Structuring
• Interim Controller/Office Manager Support
CALL THE DEALERSHIP SPECIALISTS AT HENDERSON HUTCHERSON & MCCULLOUGH, PLLC
RANDALL HEBERT, MBA, CPA, CVA
423.702.8145
TRAVIS M. HORTON, MBA, CPA
423.702.7275
1200 MARKET STREET | CHATTANOOGA, TN 37402 | 423.756.7771 | HHMAUTOGROUP.COM | @HHMAUTOGROUP
RESPONSIVENESS
Our professionals have expertise
in numerous areas, allowing us
to respond promptly to your
concerns.
PROACTIVE ADVICE
We are on the leading edge of
issues affecting dealers across
the nation, and we strive to learn
all we can about each dealership
we service. This enables us to
provide proactive advice unique
to your business.
COMMUNICATION
We want to meet with you regularly
in order to devise the best ideas,
strategies, and plans for achieving
your goals and objectives. Our
service teams are constructed to
foster consistent and effective
communication.
ACCESSIBILITY
We have low staff-to-partner
ratios, and our partners are
personally involved in each
engagement to give you
experienced guidance and
reliable service.
MAY 2014 | DEALERSHIP INSIDER
DEALERSHIP
INSIDER
May 2014
FREIGHT DEPOT | 1200 MARKET STREET | CHATTANOOGA, TN 37402 | 423.756.7771 | HHMAUTOGROUP.COM
DEALERSHIP INSIDER May 2014
YOUR REPUTATION SHOWS IN YOUR FINANCIAL STATEMENT
A dealership’s reputation ultimately shows up
in its financial statements. In fact, it shows up in
every department. So how do you make sure each
department – and your financial statements –
reflects a good reputation rather than a bad one?
The way a dealership conducts business either
hurts or helps its financial results. Dealerships are
usually very visual and active members of a business
community, especially in more rural communities.
Therefore, if a dealership treats its customers poorly,
its financial statements are eventually going to
reflect the disregard for customer satisfaction. Sales
will decrease, low customer satisfaction scores will
possibly hurt your incentive income, and your service
business will slowly but surely decrease, as well.
When accountants review a dealership financial
statement, various expenses and cost of sales
accounts are reviewed to “take the temperature”
of the store. One such account that is checked in
detail is the policy expense for parts and service.
This account can be a good indicator of how well
you are taking care of your customers’ needs. If it
is high, you may have some customer satisfaction
concerns that need to be addressed. Maybe it’s
high due to comebacks you had to eat because a
vehicle wasn’t fixed right the first time, the initial
diagnosis was incorrect due to lack of training, or
maybe your service department wasn’t equipped
for the repair. This account’s activity should be
reviewed each month and explanations for charge-
offs should be determined. Each policy expense
could be an unhappy customer who might not return
so determining the reason behind the charge-off and
addressing potential problems can help dealerships
avoid losing clients.
Another account that should be reviewed is unapplied
time in cost of sales. If this is high, the amount
should be analyzed. Are you failing to charge out
your technician’s pay correctly for the actual rate of
pay, which includes their normal incentive pay? Or
could it be you are just not busy enough? Reviewing
historical sales on prior year financial statements
can determine if total sales are trending downward,
or if just a certain type of sales is decreasing. The
number of ROs for each period should be reviewed
to see if they are decreasing or if just the dollars per
RO are decreasing. If your service department is not
busy, is it because you are struggling with getting
customers’ vehicles fixed the first time and they are
not coming back?
The detail for your cost of sales accounts for used
vehicles should also be reviewed. You should look
for entries from parts and service tickets charged
after the sale of the vehicle. If there are more than
a few, that can be an indication that you may not
be reconditioning vehicles well enough, forcing
customers to return with complaints that can
require additional work to make them happy. If you
add up the entire year and then average it out over
the number of retail vehicles you sold, you will get
an average reconditioning cost that should have
been incurred before you sold the vehicle. Normally
when you have to fix the car after the sale, your
sales people don’t share in the cost which can
W WWW.HHMAUTOGROUP.COM T 423-756-7771 F 423-265-8125
overall insurance costs through raising deductibles,
lowering coverage limits or increasing exclusions of
the policies that are retained with the commercial
provider. Even the mere existence of a captive can
cause the commercial providers to significantly
reduce premium costs in fear of losing policies to
the captive.
Although a captive insurance company is primarily
designed for risk management and controlling
insurance costs, it can also provide significant tax
advantages and cost benefits to help dealerships
maximize their financial return. The insured entities
deduct from taxable income the premiums paid to
the captive. These amounts would otherwise be
taxed at personal or corporate ordinary tax rates.
Under the small captive tax structure the premium
income received is not taxable. This creates a tax
arbitrage that permits the owner to accumulate
investment assets at an accelerated rate, giving
rise to numerous opportunities, including that of a
“rainy day” fund.
Other advantages for forming captives include, but
are not limited to, estate & succession planning,
retention of key employees and asset protection.
Here are a few considerations that can maximize
the return to you and your dealership from your 831
(b) captive insurance company.
• Deducting premiums at the dealership level at the
35% or 39.6% rate.
• Returning captive profits to the captive owner in
the form of dividends taxed at the capital gains
rate.
• Considering additional risks that could be slef-
insured to increase annual premiums to the
maximum allowable $1.2 million.
• Covering large deductible risks in the captive
adding to underwriting profits.
• Providing for the opportunity to accumulate
investment income and defer tax on the
appreciation.
Although captives offer a wide array of advantages,
there are numerous drawbacks to be wary of.
• Captives can be expensive to form and maintain
due to the initial feasibility study, formation costs,
capitalization of the company reserve & working
capital, and annual audit & tax filings.
• During cycles of soft commercial markets, it is
possible that policies obtained through the captive
could become more expensive than the outside
rate.
• If reserves needed to cover losses/claims are
underestimated, it can result in unexpected large
cash outflows.
• This is a real insurance company with real
regulatory requirements. Once the captive is
formed there is little opportunity to get “too cute.”
THE WHY NOT
If properly executed and diligently managed, a
captive insurance company can be an efficient risk
management vehicle for your dealership and an
ongoing source of profit for years to come. However,
there are many other considerations and structures
to evaluate and understand before entering into the
captive insurance market.
To learn more about establishing a captive insurance
company for your dealership, please contact us.
Article written by: Branden A. Wilson, CPA
[email protected] | 423.702.8151
THE WAY
misrepresent costs in other departments.
Another thing to look at is your finance chargebacks
as they compare to your finance income. If it seems
too high, you should review a few months of activity
to see how long it took the customer to charge you
back. If there are quite a few recent ones where they
cancelled various contracts with buyer’s remorse,
your sales department may be pushing too hard. A
heavy hand in the sales department can ruin future
relationships with potential customers.
If you aren’t paying some of your vendors timely,
more than likely there are other vendors you deal
with who also know this. This may make them
reluctant to sell to you or they may want to charge
you a higher price to make up for the delay. Word
normally travels very quickly in the car business,
and more times than not, more than 50% of what
is said is nowhere near the actual truth. Since
some of this can be harmful to your store and your
reputation in the community, you need to protect
yourself as much as possible.
Most dealers go out of their way to keep their
customers happy, as every customer is a valuable
commodity these days. It seems that some dealers
are much better than others at achieving this. You
can almost tell how successful a dealership is at
keeping customers happy just by walking around
the store and getting a feel for the atmosphere.
Is the store a cheerful place to shop? Does it
need a paint job or sprucing up in various areas?
Does the service department look grungy and in
disarray? Maybe some better storage shelves and
workbenches can increase the productivity of the
store and make it easier for your techs to find
things. Remember, every minute they are looking
for something can cost you gross profit.
Sometimes a good thorough cleaning is all it takes
to make a dealership a better place to be. There is
W WWW.HHMAUTOGROUP.COM T 423-756-7771 F 423-265-8125
a very direct relationship between what is spent on
maintenance and the condition of your store.
You should also try to walk around your store as if it
is the first time you have been there. Put on a fresh
pair of eyes and walk into your service department
as if you were a customer. What do you see? Is it an
easy, clean, organized and a simple process? Walk
into your showroom and look around as if was the
first day you bought the store and you were full of
ideas of what you wanted to change. Most dealers
lose some of this outlook because you gradually
adapt to your surroundings.
If you were sitting in your F&I department trying to
buy a vehicle, is the process fun or just a dreadful
thing you go through? You may want to actually go
through the process of “buying a car” so you know
what your customers are experiencing.
As you can see, there are many things tied to your
reputation, your status in the community, and
increased sales, and many of these things can be
addressed and fixed by using your time in your
dealership wisely. Sometimes it is just as easy to
find it in your financial statement so make sure you
are reviewing accounts and statements thoroughly.
“Your reputation can either
hurt or help your financial
results. If you treat your
customers badly, or just
don’t care about them,
your financial statements
are eventally going to show
how badly you are doing.”
DEALERSHIP INSIDER May 2014
CAPTIVE INSURANCE COMPANIES: 101 “NOT JUST FOR SERVICE CONTRACTS”
Are you interested in tailoring risk management
services to better meet your dealership’s needs?
Are you concerned that your dealership may be
overpaying for your current insurance coverage?
More dealerships are forming their own (captive)
insurance companies to self- insure selected risks.
Learn the basics, and pros and cons of establishing
a captive insurance company for your dealership.
A captive insurance company is a licensed insurance
company formed to insure and reinsure the risks of
related or affiliated businesses. A captive usually
insures the exposures and risk of the parent company
and/or affiliates or a number of similar companies,
and can be domiciled on- or off-shore. Examples of
typical policies issued by automotive dealership-
related captives include:
+ Directors & Officers + Gap Insurance
+ Physical Damage + Earthquake & Flood
+ Legal Defense + Warranty Insurance
+ Employment Practices + Service Contracts
+ Business Interruption + Emissions Tests
+ Cyber/Elec. Data Loss + Drive Train
+ Intellectual Property + Auto Insurance
+ General Liability + Repo Costs
Captives generally fall into one of two basic
categories: “small” and “large” captives. Small
captives are captive insurance companies that make
an election under IRC Section 831(b) and can write
THE WHAT
up to $1.2 million of premiums per year that are not
included as taxable income. Large captives write
annual premiums in excess of the $1.2 million cap
and are fully taxable.
If your dealership doesn’t currently own an 831 (b)
captive insurance company, perhaps you should
consider establishing one. The recurring theme with
captives is that they offer businesses significant
benefits by controlling risk, controlling premium
costs and creating an off-balance sheet “rainy day”
fund.
Dealerships can be selective in managing what risks
to retain with the commercial insurance providers
vs. what to self-insure or reinsure inside the captive.
Commercial providers often times have exclusions
and gaps, or unaffordable premiums on coverage,
leaving the operating business at risk. The captive
can insure against those commercially unavailable
or unaffordable risks, and provide coverage that
extends or fills voids in existing commercial
coverage.
Commercial providers have substantial overhead
costs built into their policies for compensating
agents, marketing & advertising costs, executive
compensation, etc. that get passed down to the
insured through higher premium costs. Captives
avoid these costs and also retain the underwriting
profits that would ordinarily be lost to the
commercial carrier. In addition, insuring risks
inside a captive can create opportunities to reduce
THE WHY
DEALERSHIP INSIDER May 2014
VOLUME OR GROSS?
We review quite a few financial statements on a
regular basis. All the franchises’ financial statements
are quite different in format and how the financial
data is displayed for your review. Each franchise
seems to think its format is the best to inform you
as the dealer how your business is performing.
Well, they are very different, but the basics remain.
There is a balance sheet and an income statement.
The income statement is broken up into many
departments; new, used, F&I, service, parts, body
shop, rental, quick lube, etc. Some statements show
some of the variable expenses under the sales and
gross profit area and others show the gross and all
expenses separately.
It doesn’t really make much difference, as most
dealers look at the bottom line on the front page and
then turn to the second page to see the summary
of all gross and expenses. Some even turn to the
sales and gross profit pages to see if the counts
seem right and the grosses appear to be reasonable
based on what type of month they think they had.
Are you a volume unit dealer with low to average
grosses or are you a large grosser with a lot less
units? You could sell 100 units at an average of
$1,000 gross profit on the front end or you could
sell 65 units at an average of $1,550 gross profit.
Either way you get to $100,000 in gross for the
month. Which way is better? Well there are quite a
few factors to take into consideration.
One is how much inventory you are carrying and
how fast you can replace it. If you want to sell
100 units per month you had better get busy and
visit the factory order bank frequently, the on-
line auctions and even physically visit auctions to
purchase enough units to keep up the sales pace
you have created.
Another factor to consider is the number of
employees you are going to need to sell 50% more
vehicles than normal each month. Can you find
enough qualified individuals to staff all the positions
such as F&I, sales, technicians, detail, etc.? You
probably can do this over time as you build up to
the increased unit volume.
You will also need to increase your variable
expenses considerably to fund the growth in units,
such as advertising, interest, commissions, drivers,
etc. to handle the volume of increased dealer
trades and picking up cars at the auctions. What
you have to make sure of is these expenses don’t
increase disproportionately to the gross generated.
Remember to make the same net bottom line income
you can’t increase your expenses very much over
what you are already incurring.
Another factor to consider is your geographic area
and the population around you. Can it provide
enough customers in your market area to supply
the sales volume you want to achieve? More and
more dealers are finally understanding the power of
the internet and driving traffic to their store with a
lower cost than the older more conventional ways
of newsprint, cable, TV and mailers. It is not that
these methods of advertising don’t work, it is just
they may not work as well as they have in the past.
For example, very few people under the age of 40
read a newspaper. The more preferable resource
for news and information is from other media
sources. More and more people are spending their
time either in front of a computer, a TV, or listening
to the radio while driving. With the increased
use and decreasing cost of smart phones, the
computer and internet have become very portable
and accessible.
One of the problems with volume is when you build
up to be a volume dealership and suddenly the
economy and car sales dive, you are likely to be
left with a higher than normal overhead structure
which can totally destroy your bottom line. It
can be very hard to shrink down to a workable
overhead factor quickly enough, as many dealers
have found out. Now everyone hopes this never
happens, but it has in the past and will again in
the future. You might want to consult your crystal
ball to give you enough advance notice (ours is
still on back order).
Does it make sense to work almost twice as hard
to generate the same gross profit? There are many
ways to make money in this business and it seems
there is not a “one for all” method of doing so.
If you want to increase your unit sales, then start
researching dealers you know who have increased
their volume considerably and document their
advertising, what inventory they are carrying,
how many units, how many conventional versus
internet sales they have, how far away are
customers driving, how many employees do they
need to accomplish this, etc.
Remember, you need to not only plan on how to
ramp up the volume, but also plan on how you can
decrease your overhead expenses and become
W WWW.HHMAUTOGROUP.COM T 423-756-7771 F 423-265-8125
more efficient so if the economy does tank, you
have a plan in place already. Make sure you don’t
increase your fixed expenses too much and keep
your variable expenses in proportion to the gross
you are generating. Complete a projection of what
your grosses and financial statements will look like
as your unit volume increases at various stages.
Predictions are for vehicle sales to increase as we
plod along in this economy. Hopefully the worst
is behind us, but we don’t want to forget the past
and drop into our old ways of management. We
should always be aware of what is happening
around us. We need to constantly keep accepting
change in our dealerships and keep moving forward
to ensure we are never at the end of the race but
are actually in the race for better profits and a
better life.