Profits, Cash and Liquidity
January 2010, Auto Dealer Today - WebXclusive
Manage Your Business Responsibility
Cash may be king in the car business but cash flow rules! It is the life blood for any business, especially for money vacuums like car dealerships. Just talk to a local banker today about getting a short-term loan for a car dealer; even with the Small Business Administration backing 90 percent of the principal, banks still consider such a loan to be a risky endeavor.
I understand the automotive industry has had more than its share of challenges over the past couple of years and that the manufacturers have brought a negative spotlight on anyone with a dealership, but I never really understood until recently why bankers were so quick to turn a dealer down for a loan. It’s because too many of us wait too long to be proactive when business gets tough. It’s because one hesitation can cost hundreds of thousands of dollars. It’s because when things go wrong, they can go really wrong, really fast.
My partner and I recently took on a client with a distressed business, pro bono. He has a well-established, 45-year-old franchise dealership that generates $10 million per year in revenue and $2 million per year in gross profit, but it loses money. Three years ago the owner went through a divorce and let me say, he must have had the same attorney as Paul McCartney. His estranged wife made out pretty well. On top of alimony and child support that more than doubles the per capita income in the country, she was awarded $750,000 in cash. And since our client, like most of us, puts every cent of his money to work, he had to finance assets to pay her off.
Now, I have known this dealership since I was a child; I grew up with the youngest son in the family. His older brother is the client, so when I heard he was in trouble, I quickly volunteered our help. Business is business, but family and friends come first, especially when they’re against the ropes. You see, this dealer has faced the same challenges as all of us for the past couple of years, but on top of a nastily-expensive divorce, he’s also fighting for his life. He found out a year ago that he has leukemia, and anyone who knows me understands why cancer brings out the fight in me. So, my partner and I dove in headfirst, just as if it were our own business.
Let me describe the financial scenario, and anyone with a 20-group background can appreciate its magnitude. The first problem is that the dealership is out of trust with the floorplanner by $120,000. Sales are off 20 percent, but the store is still generating $150,000 per month in gross profit. However, expenses are about $200,000. While the dealer has been busy with chemotherapy, doctor visits and divorce attorneys, his general manager has been busy paying the bills, and his own $90,000-per-year base salary, with revenue, not profits. It’s definitely bad news, but the problem is still manageable. Dive into the expenses and cut anything that is not absolutely essential to operations, and get current with the lender.
The second problem is liquidity. Every line of credit is maxed out and no bank would touch the business with two years of negative P&Ls and no plan of action. The dealer owns $3 million in real estate with $900,000 in mortgages. To solve the cash flow dilemma, the financial guru running the company in the dealer’s absence, a real CPA by trade, committed the business to a $100,000 short-term loan as an advance on future credit card receipts.
The dealership received $100,000 in cash and must pay back $130,000 to the financier through credit card receipts. Thirty-five percent of every credit card transaction goes immediately to the lender until the balance is paid in full. When I first learned of the arrangement, I thought there’s no way this is legal, but I was wrong. Not only is it legal, it’s another $130,000 of debt for my client just to keep the floorplan source at bay.
I am telling you this story because it is an intense lesson in cash flow management and a hard dose of reality for any dealer. The American Recovery and Reinvestment Act of 2009, the President’s bailout plan for small businesses in distress, doesn’t apply to insolvent car dealers on the verge of bankruptcy. In fact, the program, which is administered by the Small Business Administration and must go through a SBA-preferred lender, won’t help any company that is financially strained. The reason is because these “preferred lenders” are banks and even with the government backing 90 percent of the loan, they are not going to take any risks, particularly in the auto industry. But in all fairness, neither would I.
The business problems our client is facing are all self-induced. They would have been easy to correct months ago, but every day compounds the magnitude of a bad situation. The harshness of reality is that no matter what personal problems you may face, when you are a business owner, there are no excuses. It is your responsibility to manage your business, regardless of what else is going on in your life.
BHPH dealers have one luxury that non-BHPH dealers don’t; when business gets slow and cash gets tight, they can collect their way to solvency. Believe me, I thank God every day for having 300 paying clients. But, let me caution you—no, let me warn you as loudly as I possibly can—don’t be lulled into complacency with the comfort of your payment stream! Anytime you spend the revenue from your BHPH collections to pay bills for the car dealership, you are only prolonging a serious problem that will eventually put you out of business.
Bankers understand all businesses encounter problems. Yes, they hate risk and want more collateral than should be necessary, but most importantly, they want to believe that the person at the helm has a grip on things. Pay attention to every detail of your business and take nothing for granted, and when you encounter problems, you must be proactive with solutions. So, if you’ve got to go to the bank for help, they have to believe that you are the solution, not part of the problem.
Vol. 6, Issue 12