Remember, these interim monthly financial statements are only as good as the accounting that is recorded as of that date. Make sure all activity is recorded daily to receive the most accurate financial picture.
Chart of Accounts. To help you and others understand your accounting, you must start with a solid chart of accounts, which includes accounts for both Special Finance and BHPH transactions. There are many accounts that are specific to each type of vehicle sale and many others that will work for both. There should be some structure to the numbering of your chart of accounts so that when financial statements are printed, accounts appear in the correct order of liquidity on the balance sheet for assets and liabilities and in a sales, cost of sales, gross profit, selling expenses, general and administrative expenses, other income, other deductions, and income taxes for the income statement. You need to allow space in the numbering system to add new accounts as your business requires them.
Balance Sheet. Separate receivable accounts for contracts in transit, vehicle receivables (cash deals and customer down payments), wholesale receivables, installment notes receivable, side notes receivable, accounts receivable, employee receivables, etc. should be established. All of these have different liquidity times based on the nature of your business and what lenders you may deal with.
You may want to track your inventories by the type of projected sale for the vehicle, such as Retail, Special Finance, BHPH and Wholesale, along with cars versus trucks, vans and SUVs. Normally cost ranges can separate these vehicles.
Floor plan and other vehicle type financing liability accounts should normally be separated from regular notes payable, as these are the most current liability from a liquidity standpoint.
Sales. Another important item to consider when reviewing your chart of accounts is to make sure they are properly named for what balance and/or activity is recorded in the account. Setup specific sale, cost of sale and reconditioning accounts for normal retail cash sales, Special Finance, BHPH, consignment and wholesale sales. You can separate them further by adding accounts for cars versus trucks, vans and SUVs.
Cost of Sales and Reconditioning. Remember, to truly track your profitability by sales type, you must also have a corresponding cost of sale account for the original purchase price plus transportation and a reconditioning cost of sales account separated by the sale type. Lumping all of your parts and service costs for reconditioning into one account doesn’t tell you where all of the reconditioning costs really went. As you recondition your vehicles, the costs should be recorded to the stock number of the vehicle in inventory, not to cost of sales or other expense accounts. If you do post reconditioning directly to cost of sales or expense, you should make an entry at month end and also at year end to adjust the inventory balance to include all costs associated with the units still in stock at month or year end. Failure to do so will normally distort your profitability dramatically for the monthly financial statements and also the year end tax return.
Finance, Insurance and Other Income. Separate accounts for the income derived from the various back end income items, along with separate chargeback and adjustment accounts, should be setup. This will enable you to track your gross income but also the things that take it away from you.
BHPH Income and Related Expenses. Accounts specific to BHPH collections should be separated on your dealership (if you don’t have a related finance company) in the other income and deduction section of the financial statement. This will be helpful to separate from the normal sales and cost of sales area of the income statement to differentiate this type of net income from operations from the sales operations of your business.
Departmentalization. Most dealerships should review whether they need various departments and the related expense accounts established to more easily separate the different businesses you are in for your banks and also yourself to arrive at breakeven points of profitability.
Helpful Hint: To have the number of vehicles sold appear on your income statement for historical reference for the different sales categories, setup a general ledger account in either the sales area (after each specific general ledger sales account it applies to) or as the last accounts in your general ledger listing. Set up one additional account immediately after all the sales accounts or at the end of the last unit count account to act as the total of all the units and also to balance your journal entry.
Each month end, or with each vehicle sale recorded, post additional line items in accounting that credit the individual unit accounts and debit the total unit account (the last one you set up). At the end of the month when you print your income statement, you will see the balances in the sales accounts and also the number of sold units from that month. The unit counts will also accumulate normally to give you the counts for year-to-date sales. If you can’t go back and record this activity for each month due to software restrictions, you can make a year-to-date entry to record the year-to-date activity through the prior month. Then record the current month sales unit counts at the end of the current month.
Note: If anyone would like to receive a sample chart of accounts for dealership and a related finance company, including most departments you will need and allowing for future growth, please call or e-mail me, and I will forward it to you. It will also work for multiple locations with multiple departments, based on how you want to track each one.
Vol 3, Issue 10