Lessons Learned and Forgotten

It has been over a year since GM Canada began notifying many dealerships that they would be required to close their doors. Several of the dealers who lost their dealerships have experienced financial distress and may never recover. What is very sad to the outside observer is that many dealers saw, or should have seen, the writing on the wall years earlier, but were so ‘emotionally attached’ to their dealership that they were not able to react appropriately. Many kept throwing good money after bad until it was too late. Granted, the ‘dethroning’ of the largest auto manufacturer in the world may never happen again, but the lessons that could have been learned from this seem to have fallen on deaf ears.

Businesses, and more specifically auto dealers, continue to be emotionally attached to their product preventing them from operating objectively. The auto industry is becoming ever more saturated and individual dealers are seeing more and more risk in managing cash flow and liquidity. There are a vast number of dealers out there who feel that as long as they weather the tough economic climate, they will eventually prevail. Are they taking on too much risk for themselves and their families?

As an accountant, I profess that I have a conservative bent while dealers tend to be entrepreneurial risk takers. I agree that it takes risk to make money, but the risk needs to be controlled. Strong business plans and financial forecasts help entrepreneurs make informed decisions about the level of risk they are assuming, and strong creditor proofing can mitigate the amount of capital being put at risk, however often times little to none of this preliminary work is done. Usually it’s, “Let’s make a deal and then worry about the legal and accounting aspects.” I have found that the preparation of even a simple financial forecast can significantly change the decision making process and as a result I recommend my clients do this when budgeting for the following year or consider acquiring a business.

The demand for vehicles varies each month and fluctuates by manufacturer. Honda may be the hot product for 2011, but Hyundai could be the front-runner for 2012. Many dealers structure their businesses on the premise that they will attain certain sales numbers per month, however when those sales numbers don’t materialize, what is the back-up plan? Usually there isn’t one. I tell all my dealership contacts to ensure they have diversified their product lines so that when one hurts, the others can take over. A strong body shop, used car dept, leasing, parts and so on can help take over if new car sales drop.

Another way to weather the storm is to run a lean and mean operation. Too often I see dealers reacting to low volume in sales by suddenly cutting 10-30% of their overhead. Why is this only done when times are dire? If the dealership could survive on less, why would they maintain such excess? I guess GM set the tone by running ‘FAT’ for many years, and then, when sales volume plummeted, GM reacted just like the dealers by cutting costs and running lean. With increased competition, I hope that running lean will be the new norm rather than a cyclical short-term fix.

In conclusion, it is not only important to set aside money in the boon years, but it is also vitally important to critically review your dealership (with an outside advisor) to ensure you do not have tunnel vision and your rose colored glasses are not the wrong shade. In a later blog I will discuss some of the ‘savings’ options for your company.

What are you doing about fraud?

Eh, we’re Canadians aren’t we? We are an honest and polite country; so there is no way fraud is occurring at your auto dealership, right? Well, think again. I would suggest there is strong evidence that fraud is in fact occurring at your auto dealership. A study conducted by a major accounting firm and reported in the Financial Post suggests Canadian companies make great targets for fraud. In their latest global economic crime survey, Canada was the fourth most fraudulent nation in the world; behind Russia, South Africa and Kenya.

So what should you do and how can you best insulate your company to minimize the fraud risk?

Well, the first thing you need to do is recognize that fraud is a problem and accept that your auto-dealership is susceptible. This isn’t a case of admitting that you are paranoid, over reacting and in need of medical attention. It is a case of being prudent and honest with yourself and, most importantly, being vigilant in your oversight of the auto-dealership operations.

The next thing you need to do is identify the areas of your business that you think may be vulnerable to fraud and designing or tinkering with your current corporate organization structure to better insulate you and your company from fraud.

As an accountant I have witnessed various schemes and frauds in auto dealerships over the past 30 years. From relatively simple theft in the parts inventory and bogus warranty claims perpetrated by the service staff to the fraudulent refinancing of used cars and elaborate cheque washing schemes. It would appear that fraud is becoming more prevalent and more sophisticated. Know where your areas of risk are.

If you consider your parts inventory at risk, then make sure the stock room is in immaculate order and the perpetual accounting records tie into your general ledger. Initiating surprise physical counts a couple of times of year would not hurt and make your presence noted in the stock area; walk around talk to staff and consider installing surveillance cameras. However, I must warn you that installing elaborate surveillance systems is not always the answer. I believe when you resort to these measures you are admitting defeat. You may be better served by making a better effort at hiring and training your staff in the first place.

Consider requesting that all new staff provide you with permission to conduct a personal check; which would include a police criminal check. As well, make sure you set a good example and don’t blindly take parts inventory or any other item from the show and stock room without paying for it. I have heard many guilty employees comment, “If the owner takes stuff from the company, I guess it’s ok if I do it too!”

And lastly, make sure that you properly segregate the accounting duties of your employees. What does that mean? You should not permit one employee to make the daily deposits, prepare cheques, and access the company’s books and records. Don’t provide your employees easy access to perpetrate a fraud. Review the monthly bank reconciliations and at least review the sequential order of your bank return cheques to enable you to spot check the vendors and ensure the authenticity of the cheque signers. The steps are certainly no guarantee that you will be able to prevent fraud from occurring in your company but letting your employees know that you're constantly checking their work is a first step in preventing it in the first place. Also have a discussion with your bank manager about fraud. Most banks have programs that assist you in your fraud review.

The bottom line is that fraud is a fact of business life in Canada. Properly planning and consistently executing a plan to minimize the risks will not only bring peace of mind to you when you are sleeping at night or away on vacation, but it will also increase or maintain your company's profitability.