Cash Management for Auto Dealerships
Dr. Hershauer stated in Lecture 11, “Cash is king”, which is only three small words that emphasize significant meaning for managers to operate efficiently. This statement depicts one of the top priorities of why businesses, not only automotive dealerships, maintain success. New business entrants may believe the idea that you are out of business when you show an operating loss, but Hershauer (2011) proves that you are out of business when you are out of the most liquid source, cash. To directly relate cash management to the automobile industry, one has to take into account the several different departments that make up one dealership. The different components of a dealership are split up into the New Vehicle Department, Used Vehicle Department, Parts, Service, Business Office, and the Finance and Insurance Department. Vaughn (2005) implies that “there are six businesses under one roof for a reason. In a time where, say, a particular manufacturer's new product may be losing some market appeal, the dealer has the used-car business to counter-balance the drop in new-car sales”. Cash management from all of these departments involves simultaneously maximizing sales, controlling expenses, and maintaining payment from customers.
Define Criteria for the Balance Sheet
In the article, “Understanding Effective Cash Management”, Reider (2005) explains “an early step in successful cash management is for the organization to clearly define its desired criteria for results and success as related to such factors as reasons for existence, basic business principles, mental models, belief systems, performance drivers, and so on” (p. 7). Reider (2005) believes the structure of defining desired criteria for results and success is the first essential tool in cash management. The criterion includes sections categorized by organization wide, sales function, manufacturing, personnel, purchasing, and accounting. These basics are a useful tool in developing and maintaining the key balance sheet accounts for cash management at a dealership. At the end of the day, the Business Offices goal is to run negative cash on the dealership books (Hershauer, 2011). This reduces the float in the system for significant liquidity purposes. Adequate control over balancing assets with liabilities and equity is crucial to meet financial obligations. The total amount of cash, cash equivalents, and marketable equity securities is what makes the business thrive. Other assets that are current are inventory and accounts receivable, while the remaining assets are long term. Liabilities including accounts payable, interest payable, and notes payable are examples of what impacts the cash flow balance. It is the Business Offices responsibility to focus on cash flow from operations rather than net income because cash flow leaves minimal space for management to manipulate or accounting rules to distort (Hershauer, 2011). If the net income is larger than cash flow from operations then it is a sign that the dealership is not operating their earnings accurately. That is why one of the responsibilities of the Business Office is to collect all accounts when they are due or past due (Hershauer, 2011). In Graph 1, Reider (2005) exhibits the smooth flow of cash throughout an efficient business. If an automobile dealership can effectively and economically operate like Graph 1 in any situation, then their balance sheet will reap the rewards.
In the article, “Remarketing of Autos”, Blackwell (1994) informs his audience that automobile distribution is in a state of revolution because of inefficient cash and inventory management procedures (pg. 5). Industry experts have suggested that, “some major automakers are facing extinction by the end of the decade because of too much production for too few buyers” (The Columbus Dispatch, 1991). Overcapacity is one of the top reasons why a dealership...
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