The Essential Guide to Car Dealership Accounting
At the heart of a car dealership is money coming in and going out. A well-functioning car dealership accounting department keeps track of this cash through reconciliation.
The reconciliation process involves meticulous comparisons and verifications of financial records to identify discrepancies or errors. Top-tier auto dealer accounting software packages include more detailed data analysis tools for deeper insights into sales trends, profit margins, and inventory turnover rates.
In a car dealership, several departments work together to keep things running smoothly. These different departments must communicate effectively, from sales to financing to service. One of the most important communication channels is through accounting, where reconciliation comes in.
Reconciliation is checking two financial records to ensure they match up. Regarding dealership accounting, this usually means checking your dealership’s general ledger against the bank statements you receive monthly. By comparing these two records, you can confirm that every dollar is where it should be and that no unauthorized activity has occurred.
The most significant benefit of establishing consistent reconciliations is the ability to identify and rectify any discrepancies quickly. It mitigates the risk of major financial mishaps and maintains a dealership’s financial stability. In addition, it offers valuable insights into expenditure patterns, allowing dealership owners and managers to streamline operations, optimize financial resources and drive profitability.
In addition, reconciliation can catch issues that might go unnoticed by employees without regular reviews, such as payments that have been cashed but not recorded or a parts pad balance that doesn’t match the inventory schedule. Keeping up with reconciliations can also help deter fraud and incompetence by making it more difficult for unscrupulous employees to slip through the cracks.
The financial statements you prepare and use tell a story about your dealership. The more accurate and complete this picture, the better. For example, if you apply for an outside lender dealer agreement, your financial statements provide the first impression a potential lender gets of your dealership. Does it project a picture of a well-managed, professional organization on top of its game or one struggling?
Efficient and effective car dealership accounting practices help you maximize your profitability. For example, focusing on reconciling bank deposits and withdrawals against your accounting records helps ensure that cash receipts are recorded on time. Reviewing the sales and cost of general ledger account details will help you detect unusual postings that exceed your expectations.
Similarly, focusing on releasing frozen resources (aged receivables) frees up valuable working capital for other uses. And a disciplined approach to expenses is key to reducing the amount of money you spend on things like advertising or floor plan interest. A focused effort on these items can save a large sum of money for your dealership. It’s not just the responsibility of the accounting department to do this; all departments can get involved, including parts and services. It is a great way to show the lender that your dealership is on top of its game and has the right people and systems to succeed in the future.
The accounting department might not be the first department you think of when seeking to optimize profit, but this crucial area should be a top priority. Reconciliation enhances financial accuracy, uncovers potential issues, and ensures compliance. It’s also essential for tracking cash coming in and out of a dealership.
Auto dealer accounting software tools often include customer relationship management (CRM) programs that organize and maintain records of customer accounts, inventory management systems for monitoring dealership stock, and loan origination platforms for financing customers. These can all be used to monitor performance trends and help a dealership improve its profitability.
As for taxes, dealers may be subject to many different ones. These include sales tax, vehicle excise taxes, manufacturer facility programs, and documentation fees. Documentation fees, commonly known as doc fees, are a common add-on to new car purchases in some states. These typically account for costs incurred by the dealership in processing paperwork, inspections, and filings.
Some dealerships use the last-in, first-out (LIFO) method for accounting their inventory. It allows them to lower their income taxes by deferring the tax liability for high-cost inventory items. However, they must record the latest purchase prices in their cost of goods sold and perform year-end LIFO valuation procedures. As a result, the extra effort and expense associated with these activities may encourage some dealerships to switch to LIFO.
Rock-solid financial statements are essential for management to make informed decisions in car dealership accounting. It involves analyzing inventory levels, forecasts, and projections, ultimately leading to operational and financial success and profitability. It is also necessary to understand how the business performs by examining financial statements and budget comparisons.
Dealerships must be able to trust the information presented on their monthly financial statements to make strategic, long-term decisions that help them overcome shortfalls and industry hurdles. It can only be accomplished through meticulous and accurate record-keeping.
One of the most important steps in car dealership accounting is reconciling the trial balance at month-end. It includes reviewing the general ledger accounts that flow to the dealer factory financial statements and ensuring each has an accompanying reconciliation, schedule, or statement.
Other reconciliation items that must be addressed include the open parts account with the manufacturer and prepaid expenses, such as service contracts and vehicle and parts inventory costs. Dealerships must ensure these accounts are properly expensed, and any uncollectible amounts are written off on time.
Reconciliation is an indispensable practice that enhances financial accuracy, uncovers potential issues, and safeguards against errors. It also ensures compliance and drives profitability. By prioritizing it, dealership accounting departments can be positioned for sustained success in the competitive automotive business.