Manage Your Debt

by: Stephan King, CPA

In my series of articles, 10 Secrets to Dealership Financial Success, I have written a great deal about making the most of what you already have. Yes, increasing sales, adding new locations, more diversification of inventories, better market share, and adding profit centers may increase your income. However, successful dealers try to better manage the valuable assets they already own. They squeeze as much from their operations as possible.

Embarking on new endeavors involves substantial financial risk. Dealers can and must manage financial risk. All 10 secrets to dealership financial success involve managing and mitigating dealership risk factors. Where is the financial risk in your dealership? Debt and inventory are the two biggest areas of financial risk in a dealership. Why is this? Because both directly affect your dealership’s cash flow, and thus your ability to conduct business.

Debt comes in many forms. Flooring, lines of credit, trade payables, mortgages, pay plans, and compensation commitments are all forms of debt. Most dealers are very dependent on flooring and other types of debt. Debt is a dealership’s lifeblood.

Compound the need for debt to run your business with increasing costs of borrowing, and what you end up with is decreasing overall profitability of your dealership. The warning signs were with us for two years. The overall profitability of dealerships with floored inventory decreased. The cost of flooring rose approximately 100 percent in a little more than two years.

The ripple effect is less obvious. Rising interest rates affect your vendors, customers, and employees; thus, your overall cost of doing business increases. Likewise, every dealer fears potential flooring curtailments. Have you considered your own debt management strategy in a slower growth economy? Will you be able to quickly and successfully trim the excess fat created in the recent good times?

TRIM THE EXCESS
How do you trim the excess? Avoid or minimize your reliance on debt leveraging. Just say “no” to additional debt-financed inventories and draws against your line of credit. Defer, or reconsider your debt-financed dealership expansion. Dealers should carefully consider all of these things, given the current interest rate environment and the slow-down in dealers’ motorized business.

Managing debt is very similar to managing cash. In dealerships, debt is the lifeblood. Many times, you cannot get credit when you need it the most. Is your success dependent on debt? Successful dealers only acquire debt when they do not need it. Do you borrow from banks or others to meet your needs, or do you borrow from yourself? I believe the latter is a better solution. This is possible if you follow the other 10 secrets to dealership financial success.

Stephan King is a certified public accountant and partner of Moss Adams LLP. Moss Adams serves over 400 dealerships nationwide, providing creative solutions to clients’ complex issues. For more information contact them at (800) 905-4010 or visit their website at www.mossadams.com.