DEALERSHIP - Henderson Hutcherson and Mccullough€¦ · (b) captive insurance company. •...

DEALERSHIP INSIDER May 2014

WHY CHOOSE THE HHM AUTO GROUP?

We know that what sets apart a successful dealership from all of its competitors is its commitment to

service excellence. The HHM Auto Group seeks to provide the same level of service excellence to your

dealership that you provide to your customers. We pride ourselves on providing the following traditional

and non-traditional services to our clients:

HHM AUTO GROUP SERVICES

• Audit & Attest Services

• Tax Planning/Preparation

• Estate/Succession Planning

• LIFO Services

• Internal Control Reviews

• Business Valuations

• Cost Segregation Studies

• 401(k) Plan Services/Investments

• Litigation Support

• Educational Seminars

Non-Traditional Accounting ServicesTraditional Accounting Services

• Operational Reviews

• Expense Analysis & Control

• Floorplan Analysis

• Buy/Sell Structure & Negotiation

• Accounting Staff Training

• DMS Optimization

• Business Performance Analysis & Forecasting

• Financing Alternatives & Capital Analysis

• Reinsurance Company Alternatives/Structure

• Buy-Here/Pay-Here Consulting

• Related Finance Company Structuring

• Interim Controller/Office Manager Support

CALL THE DEALERSHIP SPECIALISTS AT HENDERSON HUTCHERSON & MCCULLOUGH, PLLC

RANDALL HEBERT, MBA, CPA, CVA

423.702.8145

[email protected]

TRAVIS M. HORTON, MBA, CPA

423.702.7275

[email protected]

1200 MARKET STREET | CHATTANOOGA, TN 37402 | 423.756.7771 | HHMAUTOGROUP.COM | @HHMAUTOGROUP

RESPONSIVENESS

Our professionals have expertise

in numerous areas, allowing us

to respond promptly to your

concerns.

PROACTIVE ADVICE

We are on the leading edge of

issues affecting dealers across

the nation, and we strive to learn

all we can about each dealership

we service. This enables us to

provide proactive advice unique

to your business.

COMMUNICATION

We want to meet with you regularly

in order to devise the best ideas,

strategies, and plans for achieving

your goals and objectives. Our

service teams are constructed to

foster consistent and effective

communication.

ACCESSIBILITY

We have low staff-to-partner

ratios, and our partners are

personally involved in each

engagement to give you

experienced guidance and

reliable service.

MAY 2014 | DEALERSHIP INSIDER

DEALERSHIP

INSIDER

May 2014

FREIGHT DEPOT | 1200 MARKET STREET | CHATTANOOGA, TN 37402 | 423.756.7771 | HHMAUTOGROUP.COM


YOUR REPUTATION SHOWS IN YOUR FINANCIAL STATEMENT

A dealership’s reputation ultimately shows up

in its financial statements. In fact, it shows up in

every department. So how do you make sure each

department – and your financial statements –

reflects a good reputation rather than a bad one?

The way a dealership conducts business either

hurts or helps its financial results. Dealerships are

usually very visual and active members of a business

community, especially in more rural communities.

Therefore, if a dealership treats its customers poorly,

its financial statements are eventually going to

reflect the disregard for customer satisfaction. Sales

will decrease, low customer satisfaction scores will

possibly hurt your incentive income, and your service

business will slowly but surely decrease, as well.

When accountants review a dealership financial

statement, various expenses and cost of sales

accounts are reviewed to “take the temperature”

of the store. One such account that is checked in

detail is the policy expense for parts and service.

This account can be a good indicator of how well

you are taking care of your customers’ needs. If it

is high, you may have some customer satisfaction

concerns that need to be addressed. Maybe it’s

high due to comebacks you had to eat because a

vehicle wasn’t fixed right the first time, the initial

diagnosis was incorrect due to lack of training, or

maybe your service department wasn’t equipped

for the repair. This account’s activity should be

reviewed each month and explanations for charge-

offs should be determined. Each policy expense

could be an unhappy customer who might not return

so determining the reason behind the charge-off and

addressing potential problems can help dealerships

avoid losing clients.

Another account that should be reviewed is unapplied

time in cost of sales. If this is high, the amount

should be analyzed. Are you failing to charge out

your technician’s pay correctly for the actual rate of

pay, which includes their normal incentive pay? Or

could it be you are just not busy enough? Reviewing

historical sales on prior year financial statements

can determine if total sales are trending downward,

or if just a certain type of sales is decreasing. The

number of ROs for each period should be reviewed

to see if they are decreasing or if just the dollars per

RO are decreasing. If your service department is not

busy, is it because you are struggling with getting

customers’ vehicles fixed the first time and they are

not coming back?

The detail for your cost of sales accounts for used

vehicles should also be reviewed. You should look

for entries from parts and service tickets charged

after the sale of the vehicle. If there are more than

a few, that can be an indication that you may not

be reconditioning vehicles well enough, forcing

customers to return with complaints that can

require additional work to make them happy. If you

add up the entire year and then average it out over

the number of retail vehicles you sold, you will get

an average reconditioning cost that should have

been incurred before you sold the vehicle. Normally

when you have to fix the car after the sale, your

sales people don’t share in the cost which can

W WWW.HHMAUTOGROUP.COM T 423-756-7771 F 423-265-8125

overall insurance costs through raising deductibles,

lowering coverage limits or increasing exclusions of

the policies that are retained with the commercial

provider. Even the mere existence of a captive can

cause the commercial providers to significantly

reduce premium costs in fear of losing policies to

the captive.

Although a captive insurance company is primarily

designed for risk management and controlling

insurance costs, it can also provide significant tax

advantages and cost benefits to help dealerships

maximize their financial return. The insured entities

deduct from taxable income the premiums paid to

the captive. These amounts would otherwise be

taxed at personal or corporate ordinary tax rates.

Under the small captive tax structure the premium

income received is not taxable. This creates a tax

arbitrage that permits the owner to accumulate

investment assets at an accelerated rate, giving

rise to numerous opportunities, including that of a

“rainy day” fund.

Other advantages for forming captives include, but

are not limited to, estate & succession planning,

retention of key employees and asset protection.

Here are a few considerations that can maximize

the return to you and your dealership from your 831

(b) captive insurance company.

• Deducting premiums at the dealership level at the

35% or 39.6% rate.

• Returning captive profits to the captive owner in

the form of dividends taxed at the capital gains

rate.

• Considering additional risks that could be slef-

insured to increase annual premiums to the

maximum allowable $1.2 million.

• Covering large deductible risks in the captive

adding to underwriting profits.

• Providing for the opportunity to accumulate

investment income and defer tax on the

appreciation.

Although captives offer a wide array of advantages,

there are numerous drawbacks to be wary of.

• Captives can be expensive to form and maintain

due to the initial feasibility study, formation costs,

capitalization of the company reserve & working

capital, and annual audit & tax filings.

• During cycles of soft commercial markets, it is

possible that policies obtained through the captive

could become more expensive than the outside

rate.

• If reserves needed to cover losses/claims are

underestimated, it can result in unexpected large

cash outflows.

• This is a real insurance company with real

regulatory requirements. Once the captive is

formed there is little opportunity to get “too cute.”

THE WHY NOT

If properly executed and diligently managed, a

captive insurance company can be an efficient risk

management vehicle for your dealership and an

ongoing source of profit for years to come. However,

there are many other considerations and structures

to evaluate and understand before entering into the

captive insurance market.

To learn more about establishing a captive insurance

company for your dealership, please contact us.

Article written by: Branden A. Wilson, CPA

[email protected] | 423.702.8151

THE WAY

misrepresent costs in other departments.

Another thing to look at is your finance chargebacks

as they compare to your finance income. If it seems

too high, you should review a few months of activity

to see how long it took the customer to charge you

back. If there are quite a few recent ones where they

cancelled various contracts with buyer’s remorse,

your sales department may be pushing too hard. A

heavy hand in the sales department can ruin future

relationships with potential customers.

If you aren’t paying some of your vendors timely,

more than likely there are other vendors you deal

with who also know this. This may make them

reluctant to sell to you or they may want to charge

you a higher price to make up for the delay. Word

normally travels very quickly in the car business,

and more times than not, more than 50% of what

is said is nowhere near the actual truth. Since

some of this can be harmful to your store and your

reputation in the community, you need to protect

yourself as much as possible.

Most dealers go out of their way to keep their

customers happy, as every customer is a valuable

commodity these days. It seems that some dealers

are much better than others at achieving this. You

can almost tell how successful a dealership is at

keeping customers happy just by walking around

the store and getting a feel for the atmosphere.

Is the store a cheerful place to shop? Does it

need a paint job or sprucing up in various areas?

Does the service department look grungy and in

disarray? Maybe some better storage shelves and

workbenches can increase the productivity of the

store and make it easier for your techs to find

things. Remember, every minute they are looking

for something can cost you gross profit.

Sometimes a good thorough cleaning is all it takes

to make a dealership a better place to be. There is


a very direct relationship between what is spent on

maintenance and the condition of your store.

You should also try to walk around your store as if it

is the first time you have been there. Put on a fresh

pair of eyes and walk into your service department

as if you were a customer. What do you see? Is it an

easy, clean, organized and a simple process? Walk

into your showroom and look around as if was the

first day you bought the store and you were full of

ideas of what you wanted to change. Most dealers

lose some of this outlook because you gradually

adapt to your surroundings.

If you were sitting in your F&I department trying to

buy a vehicle, is the process fun or just a dreadful

thing you go through? You may want to actually go

through the process of “buying a car” so you know

what your customers are experiencing.

As you can see, there are many things tied to your

reputation, your status in the community, and

increased sales, and many of these things can be

addressed and fixed by using your time in your

dealership wisely. Sometimes it is just as easy to

find it in your financial statement so make sure you

are reviewing accounts and statements thoroughly.

“Your reputation can either

hurt or help your financial

results. If you treat your

customers badly, or just

don’t care about them,

your financial statements

are eventally going to show

how badly you are doing.”


CAPTIVE INSURANCE COMPANIES: 101 “NOT JUST FOR SERVICE CONTRACTS”

Are you interested in tailoring risk management

services to better meet your dealership’s needs?

Are you concerned that your dealership may be

overpaying for your current insurance coverage?

More dealerships are forming their own (captive)

insurance companies to self- insure selected risks.

Learn the basics, and pros and cons of establishing

a captive insurance company for your dealership.

A captive insurance company is a licensed insurance

company formed to insure and reinsure the risks of

related or affiliated businesses. A captive usually

insures the exposures and risk of the parent company

and/or affiliates or a number of similar companies,

and can be domiciled on- or off-shore. Examples of

typical policies issued by automotive dealership-

related captives include:

+ Directors & Officers + Gap Insurance

+ Physical Damage + Earthquake & Flood

+ Legal Defense + Warranty Insurance

+ Employment Practices + Service Contracts

+ Business Interruption + Emissions Tests

+ Cyber/Elec. Data Loss + Drive Train

+ Intellectual Property + Auto Insurance

+ General Liability + Repo Costs

Captives generally fall into one of two basic

categories: “small” and “large” captives. Small

captives are captive insurance companies that make

an election under IRC Section 831(b) and can write

THE WHAT

up to $1.2 million of premiums per year that are not

included as taxable income. Large captives write

annual premiums in excess of the $1.2 million cap

and are fully taxable.

If your dealership doesn’t currently own an 831 (b)

captive insurance company, perhaps you should

consider establishing one. The recurring theme with

captives is that they offer businesses significant

benefits by controlling risk, controlling premium

costs and creating an off-balance sheet “rainy day”

fund.

Dealerships can be selective in managing what risks

to retain with the commercial insurance providers

vs. what to self-insure or reinsure inside the captive.

Commercial providers often times have exclusions

and gaps, or unaffordable premiums on coverage,

leaving the operating business at risk. The captive

can insure against those commercially unavailable

or unaffordable risks, and provide coverage that

extends or fills voids in existing commercial

coverage.

Commercial providers have substantial overhead

costs built into their policies for compensating

agents, marketing & advertising costs, executive

compensation, etc. that get passed down to the

insured through higher premium costs. Captives

avoid these costs and also retain the underwriting

profits that would ordinarily be lost to the

commercial carrier. In addition, insuring risks

inside a captive can create opportunities to reduce

THE WHY


VOLUME OR GROSS?

We review quite a few financial statements on a

regular basis. All the franchises’ financial statements

are quite different in format and how the financial

data is displayed for your review. Each franchise

seems to think its format is the best to inform you

as the dealer how your business is performing.

Well, they are very different, but the basics remain.

There is a balance sheet and an income statement.

The income statement is broken up into many

departments; new, used, F&I, service, parts, body

shop, rental, quick lube, etc. Some statements show

some of the variable expenses under the sales and

gross profit area and others show the gross and all

expenses separately.

It doesn’t really make much difference, as most

dealers look at the bottom line on the front page and

then turn to the second page to see the summary

of all gross and expenses. Some even turn to the

sales and gross profit pages to see if the counts

seem right and the grosses appear to be reasonable

based on what type of month they think they had.

Are you a volume unit dealer with low to average

grosses or are you a large grosser with a lot less

units? You could sell 100 units at an average of

$1,000 gross profit on the front end or you could

sell 65 units at an average of $1,550 gross profit.

Either way you get to $100,000 in gross for the

month. Which way is better? Well there are quite a

few factors to take into consideration.

One is how much inventory you are carrying and

how fast you can replace it. If you want to sell

100 units per month you had better get busy and

visit the factory order bank frequently, the on-

line auctions and even physically visit auctions to

purchase enough units to keep up the sales pace

you have created.

Another factor to consider is the number of

employees you are going to need to sell 50% more

vehicles than normal each month. Can you find

enough qualified individuals to staff all the positions

such as F&I, sales, technicians, detail, etc.? You

probably can do this over time as you build up to

the increased unit volume.

You will also need to increase your variable

expenses considerably to fund the growth in units,

such as advertising, interest, commissions, drivers,

etc. to handle the volume of increased dealer

trades and picking up cars at the auctions. What

you have to make sure of is these expenses don’t

increase disproportionately to the gross generated.

Remember to make the same net bottom line income

you can’t increase your expenses very much over

what you are already incurring.

Another factor to consider is your geographic area

and the population around you. Can it provide

enough customers in your market area to supply

the sales volume you want to achieve? More and

more dealers are finally understanding the power of

the internet and driving traffic to their store with a

lower cost than the older more conventional ways

of newsprint, cable, TV and mailers. It is not that

these methods of advertising don’t work, it is just

they may not work as well as they have in the past.

For example, very few people under the age of 40

read a newspaper. The more preferable resource

for news and information is from other media

sources. More and more people are spending their

time either in front of a computer, a TV, or listening

to the radio while driving. With the increased

use and decreasing cost of smart phones, the

computer and internet have become very portable

and accessible.

One of the problems with volume is when you build

up to be a volume dealership and suddenly the

economy and car sales dive, you are likely to be

left with a higher than normal overhead structure

which can totally destroy your bottom line. It

can be very hard to shrink down to a workable

overhead factor quickly enough, as many dealers

have found out. Now everyone hopes this never

happens, but it has in the past and will again in

the future. You might want to consult your crystal

ball to give you enough advance notice (ours is

still on back order).

Does it make sense to work almost twice as hard

to generate the same gross profit? There are many

ways to make money in this business and it seems

there is not a “one for all” method of doing so.

If you want to increase your unit sales, then start

researching dealers you know who have increased

their volume considerably and document their

advertising, what inventory they are carrying,

how many units, how many conventional versus

internet sales they have, how far away are

customers driving, how many employees do they

need to accomplish this, etc.

Remember, you need to not only plan on how to

ramp up the volume, but also plan on how you can

decrease your overhead expenses and become


more efficient so if the economy does tank, you

have a plan in place already. Make sure you don’t

increase your fixed expenses too much and keep

your variable expenses in proportion to the gross

you are generating. Complete a projection of what

your grosses and financial statements will look like

as your unit volume increases at various stages.

Predictions are for vehicle sales to increase as we

plod along in this economy. Hopefully the worst

is behind us, but we don’t want to forget the past

and drop into our old ways of management. We

should always be aware of what is happening

around us. We need to constantly keep accepting

change in our dealerships and keep moving forward

to ensure we are never at the end of the race but

are actually in the race for better profits and a

better life.

DEALERSHIP - Henderson Hutcherson and Mccullough€¦ · (b) captive insurance company. •...

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Transcript of DEALERSHIP - Henderson Hutcherson and Mccullough€¦ · (b) captive insurance company. •...