Floor planning is not a new topic; but it’s gotten a lot more interesting lately. As Auto News reported in a recent article, floorplan swung from a $96-per-vehicle-expense on average in 2019 to a $140-per-vehicle gain last year. The gains are attributed to slim vehicle inventories, low interest rates, and credits from OEMs.

Unfortunately, this is probably a one-time thing. OEM subsidies have died down, and gains made from new vehicle floorplans are going to be offset by high used vehicle floorplans.

We’re also likely looking at a permanent change in our industry when it comes to inventory. Many experts predict we’ll never go back to high, high levels of inventory and slower turn. I believe this is a good development for our industry. Excess inventory is a waste and accrues unnecessary interest expense.

With so many factors in flux, a hard look at your floor planning is in order. Get started with these proactive tips:

Audit your floor planning – Audit your floor plan lenders and interest rates. Record-low interest rates mean now is the time to renegotiate. Research what various financial institutions are offering and compare against your current lender. You may be able to get a better deal.

Beware of overleveraging on used cars – Sky-high demand for used vehicles has many dealers paying up to 120 percent of market value. That’s not a problem if you can turn those vehicles quickly for a profit. But beware of changing market conditions and buying the wrong vehicles. The market will correct as OEMs push out more new vehicles. Floor planning an expensive used vehicle that sits on your lot may result in a debt burden that wipes out any profit. Ensure you’re only buying your core used vehicles – those that turn quickly for higher than average profit – and be ready to re-price quickly if the market changes so you don’t take a loss at auction.

Monitor your curtailment period – It’s likely you pay interest-only on your inventory for a certain amount of time. After that, your curtailment period kicks in and you’re paying both interest and principal on the loan. Your curtailment period also runs for a certain amount of time. If that time runs out and the unit is still sitting on your lot, the lender has the right to demand full payment. It’s crucial to stay on top of these timelines. Miss a deadline and your costs can go up precipitously. This may not be a big concern at the moment but it will be when the bubble bursts.

Stay in trust with your vehicles – Selling out of trust can be a criminal offense, leave you vulnerable to civil litigation, and even cause you to lose your dealer license. Dealership groups that divert money away from paying loans and toward other business expenses may have grown too quickly or had poor cash management strategies. If you’re facing a cash crunch, one of the worst things you can do is let a few vehicle sales go out of trust and expect to make it up the next week. Experts know how quickly that can snowball. If you’re struggling, reach out to your lender first and see if they will work with you. Most will help guide you through difficult times. Going out of trust can also happen under the radar. An Auto News article reported on a dealer who went out of trust because his business manager quit and the replacement, new to the industry, thought it was okay to prepay trades and let the flooring loan float for a few days.

Research floor planning solutions – As a former Controller, I know how time-consuming managing floor planning can be. Excel simply isn’t up to the job. Take the time to research floor planning solutions that manage your data, and also help audit to ensure your balances match up. Nobody is perfect and a small discrepancy can become a big problem.

Our industry will always rely on floor plan lending to keep new and used cars on the ground. The uncertainties of today’s market present opportunities to manage and retool your floorplan to keep expense down and minimize risk as our industry changes.

I believe the paperless car deal is the holy grail of automotive retailing. In my last blog, I talked about how e-contracting is the sticking point in reaching this ideal. The reason is two-fold:

First, car deals are complex and sometimes messy. There are a lot of vendors, systems, and individual variables involved in every single deal.

Second, the paper system isn’t broken. There is nothing fundamentally wrong with using paper - the majority of customers today prefer it! Even during the pandemic, the number of customers willing to complete a deal from start to finish digitally was a fraction of all buyers.

However, e-contracting offers a lot of benefits, including faster funding and a speedier process for customers. I think it’s safe to say that as customers progressively get more comfortable with technology and eSign platforms, more will want a paperless process. But not everyone will embrace change.

For example, my 95-year-old grandfather thinks it’s ridiculous that Ford created the Lightening. For him, gas is the only way to go. When it’s only digital one day, there will be a buyer that requires you to accommodate for paper. That being said, paperless is gaining a lot of steam with dealers and customers. There are several reasons why; two of the most compelling are cost and security.

Consider that a 100 deals a month generates approximately 27 boxes of paperwork. With a cost of storage around $2 per square foot, and each box measuring about 1.5 square feet, dealers storing paper documents spend over $900 a year to store a month’s worth of deals. Over the seven years required to retain deals, that cost balloons to over $6,300. For one month of deals!

When it comes to security, deals stuffed in filing cabinets and storage lockers are vulnerable to theft and loss. Deal jackets housed in the cloud by a third-party document management solution are protected by strict access controls, and secure cloud servers with firewalls and cybersecurity tools.

I think we all agree that e-contracting is the future of auto retailing and dealers need to position themselves to incorporate these tools. Still, putting an online system into place can be daunting. To sell in a paperless manner, each piece of the deal needs to work digitally. In order to do that, you need to understand what goes IN a deal jacket.

Breaking down deal jacket silos.

The DMS is going to sell how streamlined their product is and how it will facilitate a consistent process for every deal. That’s rarely true, because the pieces of the deal are siloed between multiple parties. Consider the breakdown of a deal jacket:

• Front-end Sale/CRM documents
• Credit application forms
• F&I desking product documents
• Office and accounting documents, including tax, registration, and incentive forms
• Government required documents including Title and DMV requirements (some states will not accept an electronic signature)

Remember: your customers view your dealership as one company, not a collection of separate companies or organizations. Sure, they may understand their loan, for example, is through a separate financial institution, but they still expect you to be the expert at point of sale. Utilizing numerous products to streamline your operational process has to be perceived by the customer as a single, cohesive process.

Breaking down deal jacket silos is extremely difficult if products do not implement with your DMS. In addition, who is going to manage each software platform and make sure each piece of the deal integrates with all the other pieces? Managing digital systems can become very complicated.

Tips for preparing for e-contracting.

Dealerships across the country have cleared hurdles and put e-contracting in place. A recent article in WardsAuto noted that RouteOne had 20,000 new and used dealers enrolled on its credit-application processing platform last year, including 9,000 participating in its e-contracting service.

I believe the key to success is proper planning for how to implement e-contracting because every sales tool, technology solution, and data point, must be integrated. A great place to start is by evaluating these five questions:

1. Can it be digital? – Many dealerships have a digital contracting solution, they just don’t use the eSign feature. A solution that you already use that has digital capabilities will make it faster and easier to get up and running with e-contracting.
2. Is a digital version allowed by your financial partners and states where you do business? – More states are adopting e-contracting, but there are still hold-outs. The same holds true for lending partners. Do your homework to make sure a digital process is possible before moving forward.
3. Does your OEM currently work with a specific solution that compliments other solutions already in place? –Many OEMs have a preferred partner so investigate how that vendor will work with current solutions, how documents are exported, and how documents are archived.
4. Is the cost feasible? Hidden costs are common, especially when it comes to implementation fees. Also factor in the cost of delegating an employee, or hiring someone new, to manage the implementation and ongoing process.
5. Does your solution integrate on a granular, detailed level? Can you customize pieces of a deal that need to be customized? – Deals get complicated when incentives, special programs, and warranties are added in. The best solutions can handle these types of customizations.

The key here is to identify the hurdles BEFORE you make the commitment. If any of the questions above force you to question the answer, you need to do the research to plan a proper strategy.

E-contracting is the future of automotive retailing – but the complexity of auto deals means there are still hurdles to overcome. Now is the time to do the behind-the-scenes homework and evaluate solutions, your sales processes, and your current technology, to prepare for the online evolution. 

I know from my time as a Controller that digital contracting sounds like a no brainer for the dealership. The benefits are there: less paperwork, less storage costs, faster funding, and delivering that “friction-less” experience we’re all hearing so much about. It’s no wonder e-contracting is the new popular kid on the block.  

I believe e-contracting and the paperless dealership are the future, but rapid growth will take time. Dealers and solution providers are still trying to get comfortable with how to integrate solutions, keep costs down, and manage the process. A smooth, paperless experience is hardly widespread or the norm yet for dealers.

As a recent Ward’s Auto article put it, e-contracting is already here. But it’s a fractured process and dealers are setting themselves up for failure if they expect plug-and-play solutions. 

The e-contracting landscape right now is like a game winning strategy without a playbook. Sure, it sounds great in theory. But how do you put it into practice? The dream of an entirely digital solution takes more work than expected and implementation can be messy. If your dealership is considering signing on to an e-contracting solution, review these factors first:

The process. The promise seems to be that e-contracting technology will give you a consistent process for every deal. That’s rarely true. There is efficient e-contracting for parts of the process, but when you get to additional paperwork like manufacturer incentives, warranty documents and DMV or regulatory documents, the process is still manual. States also vary on which documents they will accept with an electronic signature.

Your bandwidth. Do you have the people and the technology to implement e-contracting? You may have to make a large investment to upgrade your systems. A large auto group has plenty of money and people to throw at the problem; a five-store group may not. This reminds me of an article I read about Elon Musk needing 200 people for a project. His company hired the people in two days, but it took 50 people to hire them and another 50 to on-board them. My point is that the behind-the-scenes work and employee time are hurdles dealers still must clear.

Bumps along the road. As interest has spiked, more large dealer groups are giving e-contracting a try. But it’s not a smooth road. Proctor Automotive in Tallahassee, Florida, brought on a digital signature solution that, in theory, collected a digital signature once and then applied it to all the necessary documents. It took 18 months for the signature product to work as expected.

Your customers. Not every customer will be comfortable signing digital documents. A true friction-less experience means meeting customers where they are in their personal buying journey. Asking customers to purchase only one way is a great way to create friction. Don’t ignore what your individual customers want. Serra Automotive, for example, uses its digital finance solution to create forms, but very rarely do customers choose to use the iPad to sign contracts. Instead, paper deal jackets are scanned and saved to the cloud via a third-party document management platform.

In a recent article on modern retailing, author David O’Brien hit the nail on the head when he wrote that no matter what technology you use or how you describe it, dealerships are still built on people dealing with other people. Meet the needs of individual customers and monthly profits will increase.  

E-contracting can be another tool to meet those needs, but there are still hurdles to clear. Consider all the factors before you buy into a game winning strategy that may not yet offer the playbook you need to succeed.

Making a list and checking it twice is one of Santa’s best known practices. It’s worth emulating when trying to manage a lot of information. Like your list of vendor partners.

The average dealership has around ten vendor partners. Large groups can have hundreds. Whatever the length of your list, proper management helps you weed out the naughty (costing you money) from the nice (making you money). 

Vendor management is not a new topic; but it’s arguably more important than ever now with margins continuing to shrink and our industry rebuilding from the pandemic hit. A hard look at your vendors can save money by cutting under-performers, weeding-out duplicates, and consolidating services under better contract terms.

Now’s the time to prioritize vendor management and make 2021 a year to rebuild and rely on those you trust. Get started with these proactive tips:

Audit your current vendors. Prior to budgeting, create a list of all the existing vendors that work with your dealership. Pull a report from your check register or run a DMS vendor report. This list helps you understand what you’re paying for, and gives you a starting point to determine what’s working and what’s not. Look for extraneous vendors and duplicate services. Are you paying for a service that comes free from one of your OEMs? Are you paying two companies for the same marketing services? Dig deep and weed out what you don’t need. 

Commit to a 6-month audit period. Take a hard look at your vendor costs twice a year. It’s surprising what can happen over just six months. Prices can go up without your knowledge. A product or service that seemed like a great idea may be doing nothing to increase sales or reduce costs. A regular audit period allows you to cut your losses before they really hurt your bottom-line.

Discuss new products and services. Tell your team what you want to bring on board before signing a contract. A department may already be using a proven vendor for the same product or service. A multi-point store may discover one franchise already tried a vendor and the relationship failed.

Designate authorized signers. Authorize only one or two staff members to sign contracts and expense the product or service. This is especially important if you have multiple stores. As a former Controller, I can tell you it was extremely frustrating to uncover an auto-renewal for a contract I knew nothing about and that we were stuck with for another year.

Create one email box for vendors. All vendor-related email notifications should go through one shared email box. I liken this to physical mail. You have one physical address where the mail goes. The same should happen with email. Designate one or two people with monitoring that email box so you never miss vendor communications.

Store all agreements in one central location. Ease vendor auditing and make it simple to find and review contracts by storing them all in one central location. You can designate a filing cabinet for this, but digging through paper contracts takes time and ups the likelihood of missing a renewal or vendor duplication. Online storage is the best option. A third-party document management platform allows you to retrieve and view contracts with only a few keystrokes, create spending reports, and stay on top of auto-renewals. You also get corporate transparency into all stores to better consolidate vendors and build the case for bulk pricing.

Santa may be for kids; but the practice of making a list and checking it often is a great tip for vendor management and all kinds of business decisions. Make 2021 a year to rebuild with a plan for regular vendor check-ins to ensure every expense is necessary to your business and adding to your bottom-line.

How and Why to Make Your CPA Your Most Important Relationship

A store may be missing over $200,000. Or $745,000. Or as much as $4.1 million. These are all real amounts embezzled from dealerships by employees. Most embezzle for years before they are caught. In one case, an employee was only caught because she was on vacation when a company called the dealership to question a large check she had written.

Up to 51 percent of dealers have been victims of employee embezzlement and theft or know someone who has, according to auditing research from Reynolds and Reynolds.

Would you know if your dealership was missing money? Most don’t. Various reasons make dealerships vulnerable to internal fraud, including high cash flows, limited internal controls, and departments with insular environments. Also, outside auditors and CPAs have limited to no internal knowledge of operations.

It is easier for fraud to go undetected when your dealership is profitable. That’s when you’re least likely to scrutinize financial records. Many dealers cite lack of resources, time, or employees to detect and prevent fraud.

But virtually every dealer has a CPA or CPA firm. That person can be your second pair of eyes. When you consider the money you could lose due to internal fraud, the cost of paying your CPA is negligible. Your CPA should be an extension of your business, instead of just a once-a-year transaction to complete your year-end audit.

Invite your CPA to learn about your internal operations and they can be proactive in conducting financial analysis, preventing fraud, and uncovering financial mistakes that cost you money. Empower your CPA to help your business with the following initiatives:

Give them the right tools. Historically, dealership documents were stored as paper files, on CDs, or on thumb drives. While digital copies were better than paper, it still took a lot of time and effort to find and analyze records. Switching to an online document management platform allows you to give your CPA immediate access. Online document management makes it easy to search for and access all of your dealership documents. By storing documents outside of your DMS, your CPA does not have to be an expert in using your DMS and he/she can access data at any time without assistance from dealership staff.

This kind of access has been invaluable for Arnold Creekmore Sr. and Jr., who’s CPA firm in Florida has been helping dealer clients since 1969. “With online documentation, we can easily download data to an Excel file and it saves a lot of time,” explains Creekmore Jr. “Because it’s not time-consuming, we can do more analysis and help dealers make good management decisions.” He points out that he and his father always prefer a dealer-client use a third-party document management platform because it ensures dealership data is accessible even after a DMS change. “When you have to amend a tax return or ask an audit question and you’ve switched your DMS and not converted to online document management, how am I going to find that data? It would be a nightmare,” he says.

Touch base regularly. It’s standard for many dealerships to sit down with their CPA only at year-end. This is a huge missed opportunity. Regular check-ins and continued access to your documents gives your CPA the power to be your second set of eyes and to nip problems in the bud. It’s smart to have a third-party performing reconciliation so that the same person isn’t handling all of the accounting all of the time. When one person has total control over your books he/she may miss errors or be tempted to skim money off the top. As Creekmore Jr. explains, “Having another pair of eyes on the books helps everyone out. Internal control is the best way to prevent fraud. You want to catch it early on before it gets big.”

Provide access to vendor agreements. Access to vendor agreements allows your CPA to properly capitalize expenses throughout the year. He or she can also perform vendor reconciliations to find errors, fraud, and poor management decisions that can cost you thousands. Consider implementing a vendor document storage solution to help stay on top of contract terms and conditions. Your CPA can monitor this solution on a regular basis to control costs, avoid accidental renewals, and transition to new vendors when a contract ends or business needs change. 

Proactively look at books to reduce write-offs. A CPA proactively looking at books can help you see, understand, and eliminate costly write-offs. “We can look at schedules and start asking questions,” says Creekmore Jr. “For example, let’s say a dealership grosses $80 million in sales, nets $1 million but then has to write-off $150k of that profit. A lot of dealers will just do it without asking what are we writing off. Is it Receivables? Obsolete parts inventory? A good CPA will do an analysis, get the information to management, and help them stop mistakes to significantly reduce and even eliminate write-offs.”

Encourage fraud investigation & prevention. According to a report by the Association of Certified Fraud Examiners (ACFE), the average time to identify theft or fraud is 18 months after the initial event. Approximately 58 percent of these cases do not lead to recovery for the dealership. Encouraging your CPA to regularly inspect for fraud can stop issues before they become a problem. Areas to investigate include unknown vendors, payments over $10,000, disproportionate departmental spending, month-over-month spending trends, improper rebates, false checks, and reconciliation of parts since it is not unheard of for employees to steal parts and sell them outside of the dealership.

The CPA relationship shouldn’t be a single occurrence to “get the year closed.” Dealers need to have two close third-party advisors: their lawyer and their CPA. Enable your CPA to be continually proactive throughout the year to uncover money saving opportunities, protect against fraud, and free-up employees to focus on higher ROI activities.

An eye-opening article in Auto Dealer Today cites dealers can generate as much as $12,000 per month in additional gross profit from retail reimbursement for warranty parts.

This makes sense when you consider that the majority of manufacturers pay on average 40 percent over cost. If a dealer is approved at 80 percent markup over cost, that dealer will in effect double warranty gross profit without increasing volume. 

Think about this for a minute: You can earn twice the gross profit simply by exercising your right for retail reimbursements for warranty parts.

Your state auto association is on your side. Thanks to their lobbying work, legislation in nearly every state requires dealers be reimbursed by manufacturers for warranty parts at retail, which is your customer parts rate. California is the most recent to join the crowd with a bill that went into effect on January 1, 2020.

Due to COVID-19, there’s never been a better time to maximize revenue opportunities. Every dealer is worried about coming out on top of the current economic crisis. Now is the time to put in the effort to secure the higher rates you deserve – and come out of this crisis better than you went into it. 

For example, Chantel Procell is the Fixed Ops Director for the Hiley Auto Group in Huntsville, Alabama. She recently went through the process of this type of audit for a few of her stores. "The process was pretty straightforward. I submitted to the info to the OEM. Most of our stores received 20-30% increases on the first request,” she said. “You can apply every year, so depending on the store, I have applied every year or two for some stores and get another 2-5%.”

There is no sugar-coating the truth: a typical process to increase your rate is time-consuming and costly in terms of labor hours. You must compile a lot of documents to make your case, but there are ways you can make the process more efficient and cost-effective.

The first step is to examine your parts-pricing matrix. This matrix is a chart of pricing structures for specific parts dependent on unit cost, volume sold, and discounts available. These variables can cost thousands of dollars in lost profit. 

What does this mean? Simply put, the OEM is looking for consistency. When evaluating reimbursable rates, the manufacturer does not want to see large swings in what the customer ultimately pays for a specific part. For example: if the retail pricing for a part is $200, and your team is charging between $135-$200 (dependent on your volume/discount matrix), the manufacturer is going to look at the average charge. Therefore, if you are only charging 70% on average due to an aggressive discounting structure, you’ll only be accepted at the 70% rate ($140). Now anytime you sell at full retail, you are losing out on a $60 difference.

It’s crucial to examine your matrix and discount policy before applying. Most manufacturers allow you to apply only once a year for a rate increase. Although it may be beneficial at that moment to apply favorable discounts for specific customers, you must understand the potential downside that this practice causes. Maintaining a consistent and tight parts structure will give you the best opportunity to maximize your reimbursed rate, therefore increasing your profit.

The second step is to get on-board with document scanning and online archiving. Your manufacturer will not just give you the rate increases. You have to make your case and that takes documentation.

Most state laws require a dealer to submit at least 100 sequential qualifying ROs to substantiate its retail rate. These documents must be detail copies that outline per-unit cost. Missing documents or in-correct versions can result in the manufacturer rejecting your submission.

A third-party document management platform makes it easy to simply type a RO number into a search bar instead of dedicating countless hours to digging through filing cabinets and boxes. Online storage also means you can retrieve the entire list of documents at once, documents can be accessed anytime and from anywhere, and there is no risk of misfiling pulled documents once you have accessed them.

The last tip is to investigate partnering with an automotive consultant who specializes in warranty parts reimbursement analysis. These companies can help you analyze your price matrixes, inform you of the laws in your state, and essentially build the “case” to the manufacturer. They will typically be specialized in certain manufacturers and know what the OEMs require to optimize the cost reimbursement percentage.

Time is important as the sooner you submit documentation, the sooner you can benefit from higher rates. With massive amounts of data and limited employee time, the combination of a scanning and archiving solution and a trained automotive consultant is likely your best bet to optimize your warranty parts and labor markups to get results faster.

Because of the current economic situation, a lot of dealers are actively seeking ways to cut costs while boosting gross profits. Do not overlook the profit potential of retail reimbursement for warranty parts. Take advantage of a document management platform and the expertise of an automotive consultant to efficiently and cost-effectively prepare a rate increase submission that, once approved, will pay dividends for years to come.