Financial Statements A Key to Your Dealerships Success

Financial statements are critically important for dealerships as they provide a comprehensive snapshot of the business’ financial health and operational performance. A dealer’s financial statement differs from other businesses mostly due to its unique relationship with the manufacturer which creates specific receivables and payables as well as other income from incentives, holdback, volume bonuses, floorplan assistance and advertising assistance. Monthly accuracy is paramount for compliance, comparability across dealerships, monitoring inventory, cash flow, alignment with industry requirements, and ultimately provide management with strategic decision-making capabilities.

Financial statements for dealerships, including profit and loss statements and the balance sheet, help to identify key metrics such as front-end gross profit, back-end gross profit, aged inventory, liquidity, working capital, debt-to-equity, and labor rates. Knowing where these metrics stand in real time can provide leadership with accurate data to make better informed decisions.

Profit and Loss Statements

The profit and loss statement, also known as the income statement, shows your dealership's revenues, expenses, and profits over a specific period. It also breaks it down by department for new, used, F&I, parts, service and body shop. It helps you understand how well your dealership is performing and identifies areas that may need improvement.

For dealerships, this could involve analyzing sales of new versus used cars, parts, and service revenue, and understanding the costs associated with each. It also could involve analyzing the gross profit of each department and analyzing things like number and average dollar amount of RO’s and effective labor rates. The profit and loss statement can reveal trends over time, such as seasonal fluctuations in sales or changes in cost structures. By delving deeper into these trends, dealerships can better plan for future expenses and revenue streams. Dealers should also review each department’s income summary, which can help to increase net income.

In addition to analyzing revenue sources, it's essential to carefully examine expense categories. This includes scrutinizing operational costs, marketing expenses, and payroll to ensure they align with industry standards and internal benchmarks. By regularly reviewing these details, dealerships can identify potential cost-saving opportunities and enhance profitability.

Balance Sheet

The balance sheet provides a snapshot of your dealership's financial position at a specific point in time. It lists assets, liabilities, and equity. For dealerships, this includes everything from cash, manufacturer’s receivables, inventory and floorplan levels, and fixed assets, among other current and long-term assets, to current and long-term outstanding loans and accounts payable and owner's equity.

By regularly reviewing your balance sheet, you can ensure that your business stays on solid financial ground and can meet its obligations. The balance sheet offers insights into the dealership's liquidity position, helping assess whether there are sufficient assets to cover short-term liabilities. The financial statement calculates the net working capital requirement which should be measured against what the manufacturer requires.

Understanding the composition of your assets is crucial, as it provides information about the dealership's investment in inventory versus fixed assets like property and equipment. This knowledge can guide strategic decisions about asset purchases and sales, optimizing the dealership's asset portfolio for better financial outcomes.

It is critical to make sure all your account balances are reconciled on a monthly basis. At a minimum, the accounting department should be performing the following:

Ensuring cash is reconciled at least monthly, preferably daily
Reviewing aging on receivables
Reviewing aging on inventory
Reviewing aging on payables
Creating cash flow analysis to monitor where cash is tied up

Leveraging Financial Statements to Meet Your Dealership’s Goals

Financial statements provide a clear picture of the dealership’s performance, allowing management to monitor performance to make informed decisions as well as providing detailed information by various departments and/or entity. Accurate financial statements help dealerships:

Enhance Decision-Making: Financial statements provide the necessary insights to understand trends, manage expenses, and allocate resources effectively. They can guide strategic decisions regarding market expansion, such as opening new locations or diversifying product offerings. Specialists can assist with the implementation and utilization of DMS software to help streamline reporting; creating usable reports to help leadership effectively manage their dealerships and make sound, data-informed decisions.

Facilitate Budgeting and Forecasting: By understanding your dealership’s past performance, you can better anticipate future challenges and opportunities to remain competitive. Accurate financial statements help in setting benchmarks and performance targets, encouraging accountability and continuous improvement within the dealership.

Budgeting and forecasting also allows dealerships to align financial resources with strategic objectives, ensuring that every dollar spent contributes to the overall vision and goals.

Meet Legal and Regulatory Requirements: Dealerships must comply with numerous legal and regulatory requirements, including tax filings and financial disclosures. Accurate financial statements are crucial for meeting these obligations and avoiding potential fines or penalties. Regular audits and reviews of your financial statements can help ensure compliance and maintain transparency with stakeholders.

Financial statements are indispensable management tools in dealerships, underpinning everything from daily decisions to long-term growth, external credibility, and ownership transitions. Understanding your dealership's financial statements is not just a good business practice — it's a necessity for staying competitive in the dynamic dealership space.

How Citrin Cooperman Can Help

Looking to streamline your dealership’s financial statement processes? Citrin Cooperman’s Automotive Dealerships Industry Practice offers specialized industry knowledge to help dealers drive growth and efficiency. Connect with our team today to learn how we can help you drive your dealership’s success.

Erin Rosenlund is a partner at Citrin Cooperman with over 25 years of experience providing a variety of tax, accounting, and management advisory services to companies in a variety of industries, including car dealerships. Christine Valaouras is an audit partner at Citrin Cooperman with over 19 years of audit and assurance experience, assisting CFOs and Controllers with interpreting and applying financial accounting standards to ensure the accuracy and reliability of financial statements.