Article

Monitoring Your F&I Income To Achieve Maximum Net Income

September 2006, Auto Dealer Today - WebXclusive

by David Keller, CPA, CFE - Also by this author

Last month we discussed F & I chargebacks and how they affect your general ledger. This month we will examine some methods of monitoring the different banks, maximizing gross profit and minimizing your chargebacks. To minimize potential chargebacks, it pays to research which vendor has the best terms. Then, when you have a choice of banks, choose the bank that has the best terms. An easy way to track chargebacks by source and how it affects your gross profit and finance income is to complete a spreadsheet for all your car deals as follows:
 
Reason Codes
EP = Early Payoff of Loan
TH = Trade-In Here
R = Repossession
TO = Trade-In Other Dealer

Date
Stk.
Customer
Gross
Customer Loan
Sold
No.
Name
Profit
Amount
Term
Rate
Payment
05/01/04
8043
Williams
$3,000
$12,900
60
16.00%
$313.70

Credit

Lender

Chargeback

Score

Name

Fee

Rate

Income

Date

Mos.

Amount

Code

586

ABC

$450

13.00%

$1,800

05/06/05

12

$1,600

EP

This is a simple method of organizing your historical and future car deal data to review what banks, loan terms, scores, early payoffs and more let you retain the most profit. You can add additional reason codes as needed.

Read your contracts very carefully. Recap the terms and conditions of the agreement and compare them to one another. You should recap the prime banks separate from the sub-prime banks, since their terms and fees vary. It seems that most banks have changed to a 75/25 type of agreement. This means they are going to calculate your total finance income and then pay you 75% of the income. They will keep 25% of the income in their reserves to protect themselves from future chargebacks. The banks normally add other payment conditions. Some more common agreements contain terms such as no chargebacks after the first three payments or the first three or six months. Some contain terms that let them chargeback for repos after the first three payments or months, etc. This means you are always on the hook for repos, but don’t have chargebacks for early payoffs after the initial payments or months have expired. Make sure your Sales and F & I departments are aware of the different bank terms and how you, the dealer, want the deal structured if possible.

To increase your F & I income, everyone has to participate. This includes sales people, sales managers, dealers, and the entire staff. If you are going to make a $3,000 total profit you should all agree that the more front end gross profit there is versus F & I income the better it is for the dealership. The reason why is there are no chargebacks on gross profit. You will retain your gross profit, but have potential future chargebacks on any F & I income based on your bank agreements and what the customer does.

The dealer and managers must install procedures and policies for every car deal to go through the same process. This is important if you want to maximize your F & I income and insure all customers have been offered the same menu of products to purchase or decline. Your dealership should use a car deal checklist that starts with the car deal and is retained in the car deal jacket. This checklist insures the process has been followed and all applicable paperwork and forms have been completed and is in the car deal jacket filed in the same order. The car deal checklist should have at least four sections: Sales, F & I, Sales Manager and Accounting. Under each section list the procedures, forms, paperwork, etc. that should be completed before the car deal and customer go to the next step.

For example, Sales should include a buyer’s order with all information correctly completed, including possible trade information. F & I should include all contracts, forms, and stips that have been reviewed and completed with the customer. When the car deal is forwarded to the Sales Manager for final review and approval (this should be done while the customer is still at the dealership if possible), it should contain all the applicable forms, assembled by the F & I department in the same order as the checklist. If these steps are completed correctly, the Accounting department should be able to process the contract, title work, or other paperwork in a timely manner. This insures the dealership receives the contract funds as timely as possible. This is especially important when conducting large sales events that last three or four days. These sales result in a large amount of cash being paid out for floor plan and lien payoffs and invested in trade-ins, while waiting for the contract funds to be received from the banks. Proper policies, relentlessly followed by all involved, will result in better cash flow.

Some dealerships have used negative incentives, charged to whoever in the car deal process doesn’t follow the correct procedures. The person who receives the car deal from the prior section can verify that all the necessary forms and steps are completed for them to continue the process with the customer. If anything is missing from the prior section it should be noted on the checklist at that time and the car deal stopped until the steps are completed. This insures the customer will have signed all paperwork during the process and correct information is entered into the accounting system to complete the car deal and receive funds in a timely manner.

One source of diminished cash flow and expense we see on our client’s schedules and general ledgers is incorrect lien payoffs calculated in the car deal. Most times the dealership has to pay a larger amount to the financial institution than what was included in the deal. This then becomes a receivable due from the customer on the general ledger. More times than not, the customer will ignore your requests for payment. Then the accounting department writes off the difference to the cost of sales applicable to the car deal. These are small amounts but add up over a period of time. Why should you have to reduce the gross you thought you made by an incorrect lien payoff? These should be reviewed for the reason there is a difference and a change in procedures should be instituted to minimize the writeoffs.

Dealerships, which have installed the proper systems and processes and also monitor them, will have cleaner and more complete car deals, which flow through each department in a timely fashion with higher gross profit and less F & I chargebacks.
 
Vol 2, Issue 10

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