The importance of reconciling vehicle inventory isobvious — if even one car is missing, your dealershipcould be out thousands of dollars. In addition, financecompanies usually come out once a month to checkfor “lost” vehicles.But what about parts inventory? Physical inventoriesare typically taken only once a year; during theintervening months, many items could disappear. Hereare three steps to clean up your parts inventory andget (and keep) your house in order.
1. Review youR RecoRds
Look back over the last three to four years — werethere large variances between the general ledger andthe physical count? Some level of variance is normal,but a sizable difference indicates a problem that couldbe innocuous — or could be fraud.A good rule of thumb is that, to minimize the effectfluctuations have on your bottom line, the varianceshould be less than 3%. If you’re satisfied with theresults of your past parts inventories, it’s time to moveforward.
2. scRutinize youR system
If your past physical inventories had variances ofless than 3%, you probably need to worry only aboutmaintenance. (See Step 3.) But if that isn’t the case,your next step is to address the physical inventoryprocess itself.Do you hire an outside company to perform thecount? There are pros and cons to this approach —usually external providers take much less time, butthey often do only one count. And though they’lltypically certify their work, it’s usually inadvisable torely on a single count.On the other hand, if you use dealership personnel toconduct the physical count, they’ll likely take longerto finish the assessment, but you can do a second (oreven third) count based on variances.If you do use an outside company and your pastvariances have been minimal, you maybe safe sticking with that provider. But if yourvariances have been greater than 3%,consider a change. For instance, you might want to trysemiannual counts — one done by a different externalprovider and one using your own staff.By changing the process in this manner, you’ll moreclosely monitor your inventory and reduce the chancethat parts will be stolen. You can also keep a betterwatch on which items are moving and which ones aregathering dust.
3. Keep it up
When you’re satisfied your physical processes are ingood order, simple upkeep of your records will helpyou remain cognizant of parts department issues.After all, a full physical count isn’t something youcan (or should) perform monthly. The cost in bothtime and money would likely outweigh the benefits.But the parts department should keep detailedrecords of all parts sales and receipts, work inprogress, and pending returns.Further, ask the department to reconcile its figuresto the general ledger balance monthly. Althoughthese numbers will never completely agree, thevariance should, again, still fall within 3%. If itdoesn’t, more research is needed. The reason couldbe simple — a shipment not yet recorded, scrapparts not booked, a price update not completed — orit could indicate theft.By monitoring parts reconciliations every month, you’llput yourself in a position to catch problems earlier andcorrect them more quickly.
Apply elbow grease.
These three steps rather broadly describe what can bea lengthy and labor-intensive process. But sometimesa little elbow grease is all you need to correct acostly problem such as parts theft. And even simplydetecting the problem can help avert fraud, as thievesare much less likely to steal from a secure area. Andisn’t security something we could all use more of?
Clean up your parts inventory
3 Steps To Getting (And Keeping) Your House In Order
DEALERSHIP
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Consider how you can best avoid family discord as youformulate your plan and when it goes into effect. And askyourself whether you know professionals to contact for help.Succession is complicated, and expert advice is a must.
GettinG seRious
Now, evaluate the complexity of your dealership’s operations,and the background and capability of your possible successors.If no family members are interested in taking over, you mayhave an employee or co-owner capable of lling your shoes.Find the best person for the job! Be objective in selecting,training and coaching a replacement.Develop a formal buy-sell agreement, which is a contract thatprovides for the future sale of your business interest. This willhelp protect against unforeseen circumstances such as suddendeath by assuring lenders and investors of the continuity of thebusiness. And, if you lack viable successors, you’ll also need aplan for selling the dealership when you bow out.
shaRinG the news
When you have your basic succession plan in place, avoid presentand future disharmony by sharing the news with family and co-owners. Listen to their feedback and suggestions as you modifyand develop your plan.Updating employees is just as important. If, for instance, you’regetting older and lack heirs, co-owners or successors, workerswon’t feel sure of their jobs. Sharing news of your succession planwill give staff a sense of security about the dealership’s future.
BuildinG secuRe foundations
Succession planning is a continuing process. Your plannedsuccessors may change their plans, or you may alter yourassessment of their viability. Your dealership also may change.So once you have a basic succession plan in place, periodicallymonitor, reassess and adjust it where needed.Your dealership may be your most important asset — so it’sessential to carefully design and maintain a succession plan toprotect it. For the good of your business and your family, startplanning your succession now.
GuaRd vulneRaBle aReas
In addition to establishing internal controls in general, youneed to implement measures specic to vulnerable areas ofyour dealership. These areas include:
Your parts and service department.
With many techniciansmoonlighting at night or on weekends in their backyards,be sure to watch your parts supply, including the disposalof old parts.Imagine having a tech who replaces good parts with nocore charge from a customer’s car, and then offers theseitems as good used parts to his or her own customers.Doing so will leave no trail at your store, and the protpotential for the fraudster is substantial.
Your new and used vehicle lots.
While you look for fraudin all the nooks and crannies of a dealership, it’s easy tooverlook larger issues, such as vehicle inventory. Onesavvy step: Regularly balance this inventory with the oorplanning statements provided by your nancing entities.Verify that your staff is handling all payments to creditorstimely and accurately.
stay viGilant
Ultimately, strong internal security at any dealership callsfor constant vigilance. If you haven’t been particularlyaggressive in this area in the past, now may be a good timeto start — before a fraudster strikes.You’d probably be quite surprised to learn that Pat,who has been managing your dealership’s accountingdepartment for all these years, has decided to becomea secret partner in your business. Pat’s role is so secret,in fact, that even you aren’t aware of this staff member’schange in status. And you’re certainly not aware of all themoney that Pat has been stealing from you.Unfortunately, employee fraud happens — puttingsome dealers out of business when the scheme finallycomes to light. Most employees who steal from anemployer start small and do it for good reasons, atleast from their perspective.And the number of employees who are willing to steal maysurprise you. “Security experts estimate that as many as30% of all employees do steal, and that another 60% willsteal if given sufcient motive and opportunity,” reports theSmall Business Administration.
watch foR waRninG siGns
Preventing fraud begins with your eyes and ears as wellas those of your most trusted managers and advisors. Beon the lookout for people in your organization who havea reason to steal. These could include workers who ndthemselves under sudden economic pressure and thosewith severe addictions. People in these circumstances areoften quick to relieve their debts or support their habits byscamming their employers.Of course, you must be very cautious to avoid violatingany worker’s legal rights. Consult your attorney beforeaccusing anyone or even discussing the matter in generalwith a staff member.Along with watching out for suspicious people, alsolook for suspicious situations. For example, if your salesvolume is strong but prots are weak, you may be avictim of fraud. Similarly, if operations in one of yourdepartments signicantly differ from those of other,similar dealerships, it may be time to start looking forleaks. (Obviously, you’ll need to conduct a benchmarkingstudy to obtain such information.)
estaBlish inteRnal contRols
Often, employee fraud is abetted by an employer whofails to develop appropriate internal controls for themanagement of cash, inventory and services. Thisshortcoming often springs from the fact that manysafeguards tend to be far less convenient and far moretime-consuming than running a business on simple trust.Requiring two signatures on every check (or every check beyonda certain amount) is just one example of an internal control thatmay slow operations but better protect against fraud.Another is engaging your CPA to perform a regularaudit of your nancial statements. Although an audit isn’tguaranteed to uncover fraud, it can still give you a betteridea of where your money is going than you mayhave right now.You’ve worked hard to create your dealership, and you’veprobably thought about what will happen when you’re no longerwilling or able to run it. But to safeguard your future legacy andcurrent protability, you need a formal succession plan.The plan will spell out your strategy for passing the dealershipto a family member or other owner or key employee, or howthe business will be sold, after you bow out. The longer youspend developing and ne tuning it, the more secure you,your family, co-owners, employees and customers will beabout your dealership’s future.
facinG facts
Even if succession is years down the road, you need to protectyourself against the unexpected. Should you die suddenly, forinstance, the business could pass to next of kin who mightnot want to run it, a co-owner you didn’t intend to have solecontrol — or even the IRS.To get started, ask yourself when and how you want to leavethe dealership. Is there someone you envision taking over,or does nobody come to mind? Do you have a way to fundthe successor’s purchase of your shares on your retirement,disability or death? Or, if you are going to gift or bequeaththe interests, do you know what the gift or estate taxconsequences will be?Proper internal control is important for all businesses andis especially important in dealerships. While never 100%foolproof, strong internal controls benet dealerships inboth protability and fraud detection.No two businesses are alike and there is no “cookie cutter”approach that will work for all dealerships. Regardlessof size, there are some basic approvals and reviews thatshould be done by all dealerships to provide internalcontrol. With a harsh economic environment being felt byall businesses throughout the country, employers mustbe aware that many employees may be facing difcultpersonal nance problems. Watching your assets closelyis important. Not giving employees and outsiders anopportunity to use business assets for their own gain isimportant for the health of the business.The following items are in no way comprehensive but arepart of an overall internal control system that addressesboth protability and fraud deterrence:
cash
:
Bank Statements:
An area that is often overlooked,Bank statements should be reconciled by someoneother than the employee responsible for cash controlsin the dealership. Senior management, including thedealer principal, should review the reconciliations forany suspicious activity and question reconciling items,review checks, etc.
Cash Controls
: Dealerships should limit the employeesallowed to conduct on-line transactions involving cash.These transactions would include ACH payments such asoor plan payoffs, payroll cash transfers, factory paymenttransactions and access to on-line banking for vericationof contract funding. Consider bonding employees involvedin cash transactions.
Expenditure Authorization:
One of the most basiccontrols in a dealership that is sometimes circumventedis having expenses pre-approved by management. In theordinary course of business the parts, service and used cardepartments will purchase inventory or outside services asa basic function of those departments. Locally purchasedparts, sublet repairs and used vehicles (often purchasedat auctions) occur frequently and are a necessity of thebusiness but a senior manager at the dealership shouldapprove a written request for the purchase of theseitems. From a protability standpoint, having a managersee in real time the purchase commitments made by theemployees and having the opportunity to review thesepurchases with the employees helps to reinforce intelligentbuying and keep the extra set of eyes on the companyassets that can deter fraud or collusion.
Check Disbursement Approvals:
Require signed managementapproval for all cash disbursements. The approval processshould include customer invoices, receiving documents (ifinventory related) and purchase orders for price verication.
When good Workers go bad:
Preventing Employee Fraud
Controlling yourdealership’s destinyFraud deteCtion /internal Control
Every Dealer Needs A Succession PlanStrong Internal Controls Benefit Dealerships
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spring 09
what’s it woRth?
An accurate business valuation helps predictthe dealership’s future by determining the taxconsequences of succession and, if necessary, settinga selling price. The valuation should include tangibleassets such as real estate, buildings, machinery andequipment, as well as intangibles such as employeeloyalty, customer base and business reputation.To further predict growth or decline, and anticipateoperating expenses, consult the dealership’s historicaland nancial records and use your judgment asowner. Weigh this information as you choose themost qualied successor to run the dealership or seta selling price.
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