First Installment: Cash Flow Management
Editor's Note: This article is a print-to-web continuation of the article, "Models of Management: Money, Metrics and Margins" that appeared on p. 24-29 of the February 2009 Farm Equipment. In that article, six Farm Equipment "Dealership of the Year" alums shared their approaches to four key areas that will impact their business' bottom line in 2009.
The four areas were:
- Cash flow management
- Interests costs
- Parts and service absorption
- Used equipment evaluations.
To complement the dealers' views, Farm Equipment also contacted two leading farm equipment dealer consultants — Stan Jackson, Stan Jackson Consulting, and George Keen, Currie Management Consultants - on their insight into the same four areas. The first installment in this web-only feature covers tips for managing for a consistent cash flow.
STAN JACKSON, STAN JACKSON CONSULTING
"A couple years of excellent sales has sidetracked conscientious cash management a bit," says Stan Jackson, Jackson Consulting. "This year, 2009, will be the year to regain discipline not only in cash management, but in all aspects of dealer management. Most dealers have enough knowledge — it's the 'doing' that has been atrophied in easy times."
Jackson advises dealers to return to the basics of "doing" - and stresses that cash flow is a function of operational management and banker relationship management.
In discussing operational management, he says that smart dealers intuitively know that cash gets locked up in used equipment, parts inventory and accounts receivables. He cautions dealers not to let up on used equipment turnover. "When sales are good is the time to relearn that a large quantity at high trade values and low turnover equals a disaster for cash flow.
"Accept no less than a 4-time turn; no piece of used equipment should be owned by the dealer for more than 60-90 days. If 4-times turn is already a reality, go for 5.
"Turnover simply cannot be left to chance. It must be managed every day."
The easiest way to accomplish this, he says, is to hold salespeople responsible for the used they create, and to hold them to turnover goals.
He also notes that savvy dealers focus on the most often procrastinated function in the dealership: the timely completion of work orders and billing of service work. "Work orders often remain uncompleted and unbilled for weeks - even months - past the completion of the mechanical work."
One dealer recently adopted a guideline of completing and billing all work orders within 5 days after the completion of the mechanical work. While this required a major process change in the shop and unprecedented cooperation between the service manager and dealership accountant, Jackson notes that the results can be tremendous. "After this policy was in place 3 months, the dealer proudly reported over $100,000 of cash flow improvement for that quarter and still improving - directly related to the policy change." And according to Jackson, the larger the service department, the more cash is locked up.
Two more areas of opportunity in operational management are:
Factor A/R to outside companies — "This is almost trite, but the cash flow benefits truly outweigh the cost," he says.
Cash sweep accounts - A number of dealers use this feature already, says Jackson, but many still do not. "If the dealership has more than one cash-handling location, sweep accounts should be considered. There are too many benefits to ignore."
Particularly in today's environment, Jackson stresses the importance of managing the relationship with the banker. Instead of just talking tactical plans, he advises dealers to get face time. "Share plans and develop funding for strategic plans several years into the future," he says. "Ask your banker to consider you as a strategic alliance account. That is, you need each other to reach your respective strategic goals," he says.
"By planning funding around your most important strategic goals, you give your banker insight into what your real mission and goals are and also provide evidence of the professionalism of you and your staff. Bankers want to know your business, but you have to teach it to them."
Jackson also encourages multi-location dealers to provide cash budgets in addition to sales and expense budgets and to share them regularly with their bankers. "Most dealers don't do cash budgets, because banks have not always required them. But bankers are now under extreme lending scrutiny. They need more documentation to support their lending decisions."
According to Jackson, dealers that send in cash budgets to bankers before they are asked are illustrating a good management practice and providing a clear signal of proactive professionalism. "Make it easy for bankers to do business with you by consistently demonstrating improvements in management professionalism," he says.
GEORGE KEEN, CURRIE MANAGEMENT CONSULTANTS
According to George Keen, Currie Management Consultants, the first and most important way of maintaining cash flow is to maintain dealership profitability. "You need a strong financial model that develops profits consistently in good times and bad. If you follow this, you will adjust your expenses to the revenue and you will continue to employ productive people."
He also advises dealers to consider their aftermarket (parts and service departments) revenue and look at the balance of the revenue to the total sales. "You want the gross profit of these two departments to be absorbing 100% of your total dealership expenses. If your balance in sales and maintaining good profit levels is such that you are at 100% absorption, you will not be experiencing as much pain as other dealers this year."
Keen also asks dealers to question their views of buying vs. leasing. When a dealer can utilize a lease (equipment, tools and trucks) or lease-back (buildings), the result is a freeing of resources. "Is there a business reason for owning equipment, or is it an emotional attachment to the assets?" he asks. He encourages dealers to use outside sources for hauling and delivery instead of owning their own fleet of delivery equipment. "Not only will it free up cash, but it will also encourage you to bill the charge to the customer when you receive the invoice from the delivery/transport company."
Pre-sell discounts should also be increased to help manage cash flow, he says. "You want to encourage pre-selling and be sure that not only do you have the pre-sold units trade-ins sold but that all the buyers have good current and stable credit. You don't want to think a good deal is solid and finished only to end up with either the new or the trade-in units on your hands."
Finally, Keen encourages dealers to use OEM or bank floor plans. "Ask for special, extended terms for slow movers," he says.
Next Installment: Managing Interest Costs