Congratulations. If you’re a dealer principal reading this and your doors are still open, you’re to be commended. Why? Well, 15 Home Depot stores didn’t make it through the first quarter. Neither did 160 Movie Galleries and 384 Bombay retail stores. Foot Locker, 140 stores, and Zale’s, another 23. Yes indeed, these are tough times to be in retail. But you’re still here; and best of all, you’ve made it through the extreme cash crunch of the fourth quarter of ’08, and the dismally slow traffic period of January and February when the floor was so quiet you could hear the payroll clock going tick tock, tick tock.
In fact, retail is so tough I’ve had several of my dealer friends and clients suggest that I must have had a crystal ball in regards to the timing of the sale of our Atlanta-based dealerships. Well, what comes around goes around, and let’s just say that the timing for my little venture into real estate investing couldn’t have been worse. Oh well, what doesn’t kill us will make us stronger, right?
So, with spring on the horizon, it’s time for my annual make hay while the sun shines article. But that would be too predictable, so I’m going to throw you a twist. Let’s talk about something near-and-dear to every dealer’s heart right now — cash flow. In my second-edition special report titled, How to Simply and Easily Uncover the Hidden Wealth Buried in Your Dealership and Recession Proof Your Store in the New Economy, I cover 11 different cash-sucking areas in your dealership.
Here’s why: Most likely you didn’t get into the motorcycle business because of your love for compiling and analyzing financial statements. If you’re like me, you got into the business because of a passion for the products and/or a glaring opportunity in your local marketplace. What does this have to do with understanding your balance sheet? Not much. However, when business was great, the economy was strong and the powersports industry was booming, you could manage your store with the profit and loss statement provided by your accountant. And assuming you had money in the bank, life was good. But in most cases, unbeknownst to you, the strong market conditions were disguising a plethora of cash-sucking parts of your store. Let’s look at two of those areas.
I once returned from a 20-group meeting a little too optimistic about our opportunities within the used bike market. According to my ratios, it appeared I had much forward-earning potential in the pre-owned market. I had a new sales manager who came over from the automotive world and had been trying hard to convince me to be more aggressive with used vehicles. So, I cut him loose — bad mistake. During the peak of the second quarter, he aggressively took in anything and everything on trade short of a 22 pistol and a snapper push mower. Of course, looking back it’s easy to see all he cared about was rolling more units, making more personal income, and seemingly bragging about how much he was selling. All the while, the profit and loss showed a healthy dealership, but in reality, cash flow was hurting in a big way — and our store was far from healthy. It’s pretty basic math. If you make $34,000 in net profit and take in $53,000 in trades, your bank account is feeling it. Now, to make matters worse, I found out the trades were over-stated and ultimately had to take huge write-downs to sell them. This whole fiasco took place in less than 60 days, yet it took nearly a year to recover from (and I still have a scar). I’m not attempting to shed a negative light on being in the used bike market, I’m only pointing out that tight used bike inventory control is a requirement to recession-proof your dealership in the new economy.
Parts and Accessories Inventory
In most dealerships your P&A represents the largest cash asset in your store. If you’re allowing your department manager to openly place orders without an “open to buy” or some other buying strategy in place, you’re playing with fire. Unfortunately, too many P&A managers are given an open checkbook, which inevitably leads to negligent purchasing, excessive inventories, tons of obsolescence, and potentially a dealer principal who is flat broke. Many P&A managers are guilty of ordering based on emotions rather than data. Perhaps they were coaxed by some free swag from the sales representative. Maybe they’re trying to meet a high-volume discount to increase margins because they are paid off of gross, or perhaps they were just never trained to know any better. Nevertheless, just as with the consequences of making mistakes on used unit inventories, the penalty for not closely monitoring your P&A inventories can be fatal in today’s market.
I’ll take a wild guess and say that the above-mentioned retail companies didn’t decide to close the doors because of what was stated on their P&L, but rather the effects of cash, or lack thereof, on the entire business.