Cash has always been king, but in today’s market, when getting a line of credit from your local banker is more difficult than climbing Mt. Everest barefoot in a Speedo, attention to detail is paramount.
In this — the new, evolving economy — astute dealers are closely monitoring cash sucking components like payroll, used unit inventory, parts and accessories stocking levels, returns to vendors, repair orders completed and accounts receivable, such as retail holdback, contracts in transit, co-op and warranty.
Speaking of warranty, this can be a tricky receivable to manage for several reasons. First, submitting a warranty claim is an administrative function, and, by nature, most rough and tough service managers would rather work into the wee hours of the night tearing down a ’72 CB750 than manage paperwork. It’s human nature to gravitate towards the things we enjoy and to have an aversion to the things we would rather not do. And it’s this natural lack of appetite for paperwork that can create the perfect warranty-related cash flow storm (in a hurry) if Mr. Dealer Principal isn’t on his toes. And even though it’s possible to hire a warranty clerk to do the administrative work — if the service manager doesn’t properly understand, follow and support the warranty process — the clerk will be set up to fail.
Second, in most cases you can’t totally rely on your standard accounts receivable report to accurately quantify whether warranties are getting submitted and paid. Why? Because a warranty receivable only shows up on this report if it has been closed or cashiered in your DMS. In other words, it only shows up if your service manager wants it to show up. One of the scary habits of many service managers is to allow the customer to pick up and leave the dealership with his unit and have no urgency in completing and closing the RO in the DMS. "What’s the harm? It’s warranty pay, and why should the customer be held up while I do paperwork?" It’s this mindset that leads to this future catastrophic disaster. While these are good intentions made with fairly sound judgment, once the unit is gone, it’s out of sight and the follow through of dotting Is and crossing Ts required is out of mind. This is one of the many reasons I highly recommend a monthly physical inventory in your service department where you compare actual units on hand to actual open ROs in the system.
Unfortunately, many slacker service managers have an entire play book on how to camouflage unpaid warranties, along with their own lack of performance. I’ve also observed the warranty receivables reports showing a large sum of outstanding claims as current only to find out after 30 days that, although they were closed and cashiered in the DMS, they were never submitted to the OEM. By the time the report exposes the error and an investigation is launched, it’s often too late to submit the warranties. The technician has been paid, parts have been bought, shop supplies have been paid for, and Mr. Dealer Principal eats it. Ouch!
Then there is what is perhaps the most painful warranty related snafu of all. This is when you receive the warranty credits from the OEM that give you that warm and fuzzy feeling. Subsequently, the next month, you’re reviewing your statement only to discover you’ve been charged back because the OEM called for the parts on the RO to be sent back for inspection. However, because they were not properly tagged and stored, they can’t be located and therefore can never be sent back. Just because the OEM giveths, doesn’t mean it can’t taketh away. Double Ouch!
Perhaps this double ouch is so vivid to me because I once had a service manager cost me over $15,000 in charge backs. I never saw it coming, hence the title of my column, "Lessons Learned." (I’m pretty consistent with learning things the hard way.) It was back in ’97 when a particular OEM was having a warranty recall on the entire engine short block assembly. It was a popular model, and, as you can imagine, customers weren’t happy about having the engine in their brand new unit replaced. Technicians weren’t happy about doing the work because they didn’t feel the allocated time to perform the work was realistic. I was caught in the crossfire of trying to ensure customers were taken care of, our tech’s constant whining wasn’t going to run off my service manager (because I knew I didn’t want his job) and high dollar claims were being accurately submitted to the OEMs. The good news was that we were dotting Is and crossing Ts while submitting claims; bad news was the old engine cores were being internally swiped, and we didn’t catch it until the OEM called for the parts!
Unfortunately (or fortunately), we often learn more from our failures than our successes. This warranty-related fiasco really stuck to my ribs; however, the much less expensive way is to learn from others’ mistakes. So here you go … this one’s on me.