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Now is not the time to panic!

22 October 2008

Presenter: Angelo Sirianni, Colledge’s

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This presentation has been prepared by Colledge’s for the general information of its clients and seminar attendees. While the information herein has been prepared with all reasonable care and derived from sources believed to be accurate, no responsibility or liability is accepted by Colledge’s or any of its affiliations, for any errors or omissions including liability to any person of negligence or otherwise.

Recommendations may not be appropriate in all circumstances and clients must consider their own personal objectives and financial advice before acting on recommendations in this presentation.

Colledge’s (ABN 52 439 950 641)

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We are all inventors, each sailing out on a voyage of discovery, guided each by a private chart, of which there is no duplicate. The world is all gates, all opportunities.

Ralph Waldo Emerson(19th Century American essayist, philosopher and poet)

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Economic Update

• Implications of the Global Financial Crisis for the Australian Economy.

• Why there is unlikely to be a large, across-the-board fall in Australian house prises as there has been in the US.

• Government decisions.

Luxury Car Tax (LCT)

•LCT rate of 33% to apply to all vehicles over the threshold amount of $57,180 (2008-9) including GST. 

•If a contract to purchase or import a luxury car was made before 13 May 2008 at 7.30pm AEST, the LCT will remain at 25%, irrespective when the car is delivered. 

•LCT rate of 33% to apply to all fuel efficient vehicles over the threshold amount of $75,000 including GST. 

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Luxury Car Tax (LCT) 

•Applies to all taxable supplies or taxable importation of luxury cars on or after 1 July 2008. 

•“Fuel efficient vehicle” is defined as fuel consumption not exceeding 7 litres per 100km as a combined rating under the vehicle’s standards in force under Section 7 of the Motor Vehicles’ Standards Act 1989. 

•The limit of Fuel Efficient vehicles for 2008-9 is $75,000. The limit is indexed annually using subdivision 960–M of the ITAA 1997.

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Luxury Car Tax

Primary Producers will be entitled to a refund of the luxury car tax if:

• The luxury car tax was paid at the time, carrying on a primary production business

• Amount of refund is the lower of 8/33 of the luxury car tax borne or $3,000

• Cannot claim for more than one vehicle per year

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Luxury Car Tax 

Tourist Operators will be entitled to a refund of the luxury car tax if:

•The luxury car tax was paid

• The vehicle will be solely used for the purpose of carrying on a business and the principle purpose is carrying tourists for tourist activities

• Amount of refund is the lower of 8/33 of the luxury car tax borne or $3,000

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Luxury Car Tax

Claiming refunds on eligible cars:

1.If eligible, a refund can be claimed once the luxury car tax regulations have been passed. (Refunds will also apply where they have been paid to Customs)

2.Claim a refund within four (4) years of becoming entitled

3.The legislative arrangement regarding these refunds is currently being drafted

4.On the approved form

5.Refunds of the LCT are claimed from the Tax Office

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Luxury Car Tax

Administrative Arrangements for Dealers: (applicable from 1 July 2008) Application of the new rate of 33%: 

•To any taxable supply of a luxury vehicle on or after the 1 July 2008.

This means, the new rate applies when the car is delivered, even if the sales were attributed to a tax period prior to 1 July 2008.

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 Luxury Car Tax

Administrative Arrangements (cont)

Dealers who anticipated the rate rise:

•Must provide a refund of the additional 8% LCT for cars contracted before 13 May 2008, 7.30pm AEST, and delivered after 1 July 2008.

•Must report and pay the remaining additional 8% LCT in your first activity statement after 3 October 2008.

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Luxury Car Tax

Administrative Arrangements (cont)  

Dealers who did not anticipate the rise:

•That is, contracted on or after 13 May 2008, 7.30pm AEST, and delivered after 1 July 2008

•Seek the additional 8% LCT payments from buyers, unless this right was specifically excluded in the contract

•Must report and pay the remaining additional 8% LCT in your first activity statement after 3 October 2008

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Luxury Car Tax

Administrative Arrangements (cont)

Ongoing Reporting and Payment 

•Following the initial payment of the LCT as described previously, dealers must continue to report and pay LCT in-line with their usual obligations. 

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Luxury Car Tax

Administrative Arrangements (cont)

Calculating which rate applies: 

•To determine the applicable LCT rate will depend on the following:

When the car was ordered When the car was delivered The type of car, e.g. fuel efficient Whether primary producer or tourism operator 

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Luxury Car Tax

The LCT rate applied will vary

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Delivery Date Applicable LCT Rate

Cars delivered or imported before 1st July 2008

• 25%

Cars delivered or imported after 1 July 2008 and before 3 October 2008 including fuel efficient vehicles under $75,000.

• 33%, or • 25% for cars

contracted before 13 May 2008 7.30pm AEST

• Primary producers and tourism operators can claim a refund of the LCT from the Tax Office up to $3,000 on an eligible car

Luxury Car Tax

The LCT rate applied will vary (cont)

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Delivery Date Applicable LCT Rate

Cars delivered after 3rd October 2008

• 33%• 25% Fuel efficient

vehicles under $75,000

• Primary producers and tourism operators can claim a refund of the LCT from the Tax Office up to $3,000 on an eligible car

Parts

Key Parts Department Indicators

1. Total Parts Gross 27%

2. Total Parts Expense 45%

3. Total Parts Selling Gross 55%

* Before allocation of departmental expense

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Parts

Parts Department Breakeven

Mark up required to breakeven

Parts Department Expenseadd Allocation of Fixed Expense= Total Parts Department Expense

Total Parts Department Expense

Total Part Cost of Sales

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= Mark up to Breakeven

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Return on Investment Parts Inventory

Parts Selling Gross Annualised

Parts Inventory

* Parts Selling Gross =

Parts Gross ProfitLess Parts Department Expense

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Forecast Parts Inventory Needs• Determine if there is excess inventory that needs

liquidating

1.Projected Performance

Projected Cost of Sales (Annualised)Desired Stock Turns

Compare Actual Inventory with

Average Inventory Needed

= Under or Overstocked situation

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Average= Inventory Needed

Forecast Parts Inventory Needs (cont)2.Part History

Actual Cost of Sales (YTD) AnnualisedDesired Turns

Compare Actual Inventory with

Average Inventory Required

= Under or Over Stock situation

Therefore, commence discussion with your Parts Department

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Average= Inventory Required

Inefficient Parts Inventory

•Suggest Guide 1½ month’s supply = 8 Turns

•Determine Sales required for Inventory on Hand

1. Inventory Value x Turns = Cost of Sales

2. Determine Revenue base on GP% desired (achieved)

3. Determine Gross Profit required

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Inefficient Parts Inventory (cont)Example: Inventory $432,708

Turns 8

GP 21.9%

Therefore required Sales and Gross Profit should be:

$432,708 Inventory x 8 Turns = $3,461,664 Cost of Sales 78.1%

Revenue = ($3,461,664 / (1-21.9% = 78.1%) = $4,432,348

Gross Profit = $ at 21.9% = $970,684

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The Inventory Control System

•Does it fit the Dealership needs?

•Periodically check several Parts on hand with inventory records

•Become more involved in Parts Department – constant reviews

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Ordering•Base orders on movement, turn patterns & lead times

•Establish turn objectives for total and specific lines

•Watch turn by line – minimum turns per year

Very fast movers should turn 12+ times per year

Fast movers should turn 6 times per year

Medium movers should move 4 times per year

Slow movers should turn 3 times per year – keep stock to a minimum

• Utilise stock orders to get best price

•Avoid use of non stock items

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Control of Stock

•Post stock when put in bin

•Require requisition or invoice for every order

•Periodic physical stock take

Use outside teams to ensure objectivity

Do it at quiet time – weekend, etc

•Plan layout to expedite stock activity = fast movers up front

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Parts Salaries versus Parts Sales

Productivity

•Measure Parts Department employees productivity

•Review dollar sales achieved against actual salary cost incurred

•Benchmark $ Sales per $ Salary

Total Parts Sales YTDTotal Salary Cost YTD

•Evaluate Parts Department personnel performance

•Level of personnel required

•Parts Department potential

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= $ Sales per $ Salary

Cash Flow Analysis

Cash is King!

Two key financial analysis of the balance sheet

1.Net cash position Cash needed to meet the obligation of the business

2.Working Capital A favourable balance of assets over liabilities so it has the capital to generate income

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Cash flow Analysis

Net cash = Cash sources versus Cash demands

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Cash SourcesCash on HandCash at Bank

Finance contactsMarketable SecurityVehicle Receivables

Cash DemandsAccounts PayableCustomer DepositsService Contracts

Overdraft

Cash flow Analysis

The Cash Flow Statement

•Cash Flow from Operating Activities

•Cash Flow from Investing Activities

•Cash Flow from Financing Activities

Equals Net Change in Cash Held

Reconciliation

•Opening Bank Balance

•Closing Bank Balance

Equals Net Change in Cash Held

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Cash flow Analysis

The Cash Flow Statement

Example: “Home Town Motors”

Year ended 30 June 2008

Profit $931,872

ROS% 4.4%

GP% of Sales 13.1%

Working Capital 1.4 : 1

Net Change in Cash Held $96,142

Why has cash held increased only by $96,142?

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Cash flow Analysis

The Cash Flow Statement

•Cash Flow from Operating Activities $226,929

•Cash Flow from Investing Activities $(107,181)

•Cash Flow from Financing Activities $(23,605)

Equals Net Change in Cash Held $96,142

Reconciliation

•Opening Bank Balance $692,400

•Closing Bank Balance $788,542

Equals Net Change in Cash Held $96,142

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Basic Cash Flow Analysis

Net profit

Add back Non-Cash item (Depreciation / Amortisation)

= Cash from Operations

Cost Generation

+/- Changes in Current Assets: Decrease = Cash Inflow

Increase = Cash Outflow

+/- Changes in Current Liabilities: Increase = Cash Inflow

Decrease = Cash Outflow

= Cashflow generated from Operations

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Basic Cashflow Analysis (cont)

+/- Addition or Reduction of Fixed Assets

= Cashflow for Investing Activities

+/- Long-term Liabilities

= Cashflow for Financial Activities

= Cashflow

Statutory Method

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Excess Cash Tied UpGuide months

• Parts & Service Receivable 1.5

• Warranty & Parts Receivable 0.8

• Used Inventory 2.0

• Parts Inventory 1.5

• New Inventory* 1.5

* Not necessarily excess cash tied up, relates to excess inventory leading to excessive floor plan changes

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Credit & Collection Program

1. Use an ageing schedule

2. Credit application for new customers

3. Credit limit for all customers

4. Credit approval for sales over $XXX

5. One person to approve all credit

6. Discount for timely account payment

7. Invoices sent within five working days

(points 8-14 next slide)

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Credit & Collection Program (cont)

8. Invoice during month – not month end

9. Add cost to overdue accounts

10. Cease credit for anyone outstanding

11. Letters to past due accounts

12. Have DP follow up

13. Collection agency for overdue accounts

14. Periodically follow-up written off accounts

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Benchmarks

View Colledge’s and AutoTeam Australia’s Automotive Industry Benchmarks