Accountants Understanding The Obstacles

Setting up a reserve for doubtful accounts is a good practice for dealerships to have.  This reserve should be analyzed and adjusted monthly.  Often times we see this calculation is established at a certain amount and not updated every month.  Dealerships have many different types of receivables with varying time lines of when they are considered doubtful.  The following is a general guide to setting parameters for which receivables are setup as doubtful at the end of each month:

Contracts in Transit  – Accounts over 30 days
A/R – Parts, Service, and Body Shop - Accounts over 120 days
Warranty Receivables - Accounts over 60 days
Finance Reserves –  Accounts over 60 days
Factory Receivables – Rebates and Incentives  – Accounts over 60 days
Vehicle Receivables  – Accounts over 30 days
Factory Receivables – Co-op Advertising  – Accounts over 60 days
Accounts Receivable – NSF checks  – Accounts over 60 days

This account should be adjusted each month with the adjustment going to bad debt expense.  When you receive payment for a receivable that is in your allowance for doubtful accounts, you should receipt the payment against the receivable and adjust that receivable off of your allowance for doubtful accounts.  If you decide to actually write-off the receivable, your offset should be the allowance for doubtful accounts.

Remember this account should be analyzed and adjusted at the end of each month.  Keeping a spreadsheet of the items included in your monthly adjustment is a great tool to not only track payments received but also for use in management meetings when discussing aging accounts.

Kane Lavin, CPA

One of the newest trends in marketing for dealerships is apps.  So, what is an “app?”  An app is a web application that is accessed through the Internet, typically on a mobile device.  Mobile platforms, such as the iPhone, Blackberry and Android-based smart phones, have changed the way people are accessing information.  The individuals that download your application are looking for quick access to the information and services that are important to them. 

An application gives your customers a virtual showroom in the palm of their hand along with slides shows and 360 degree views of your vehicles.  Customers can then request a quote regarding a specific vehicle or request further information.  You can include walk-around videos or links to your YouTube postings.

Your application can also include helpful items such as one-touch calling, directions to your location, coupons, specials and announcements, contact information of the various departments within your dealership, the ability to schedule a service appointment or even order parts.

An application can be an effective sales tool and can make shopping for a vehicle at your dealership a fun and stress-free experience.  This technology may change the way your customers shop for cars.

Amber Powell

Keeping our employees engaged is critical to maintain productivity, efficiency and retention.  However, we sometimes forget how valuable our staff is to our company.  Here are a few suggestions (that won’t cost you anything but a few minutes of your time) to keep employees motivated:

• Emphasize your company’s mission statement and how it relates to your employees.  Tell them how important their roles are when it comes to achieving these goals.

• Lead by example.  If you expect a certain behavior from your employees, you should do the same.  Communicate what you want by setting a good example and not just by talking about it.

• In order to keep your employees committed, they need a strong relationship with their manager along with clear and open communication.  It should be stressed that all managers have an “open door” policy and employees can talk to them about anything at anytime.  Employees need to be able to communicate their frustrations and concerns.  They may even offer suggestions for improvements that only someone at their level could conceive. 

• Formal evaluations should be performed annually but your staff should also be given periodic feedback throughout the year with regard to their progress.

• Tasks should be tailored to what the employee does best.  They need to know what is expected of them and have opportunities to learn and grow.  When a person is confident in their job performance, they tend to be more engaged in their work.  Since most satisfied employees are looking for advancement within their own company, don’t forget to consider promoting from your current staff before looking to hire someone from the outside.

• Everyone needs a pat on the back now and then, so be generous with your praise.  Whether you do it privately during their annual review or publicly in your weekly sales meeting, it is important for your employees to feel appreciated.  Just a quick and sincere “thank you” and “good job” can go a long way.

• Create and promote a positive atmosphere.  Acknowledge that things are tough right now, but working as a team, you will all get through it together.  A positive work environment will encourage your staff to maintain their optimism.

• Failing to follow through on your promises can really be a blow to company morale.  Don’t make promises you can’t keep, and be sure to keep any promises that you do make.

The most valuable asset of any company is its people.  Employee motivation can make the difference between success and failure of your business. 

Amber Powell

In the car business we often have the “if it ain’t broke, don’t fix it” mentality.  This holds true especially when it comes to the fixed operations departments.  It has always been assumed if car sales were flat; the fixed ops department would carry the dealership.  Today more than ever with our current economy it is imperative that all dealers take a proactive approach to all aspects of fixed operations.

A dealer’s parts inventory can be valued anywhere from hundreds of thousands of dollars to millions yet in many instances dealership owners do not focus much on this department as long as the profits stay consistent from year to year.  A dealership’s parts inventory is a very large asset that needs protecting.  One very important event that should be happening yearly in order to protect this asset is a parts physical inventory.  There is much debate whether a physical inventory should be done by an outside inventory company.  Some dealers feel it is an unnecessary expense but in reality a lot of good can come out of using an outside inventory company even for extremely well run parts departments.

Can you use a fresh perspective?  Keep in mind by using an experienced inventory company you are also gaining access to best practices of hundreds of other dealerships’ parts departments.  Just because you do things a certain way does not mean it is the best way to do them.

Do you have weaknesses in controls?  Parts theft is a very real problem.  Even the tightest run parts department can have vulnerabilities.  If you have a variance after performing an inventory is any follow up done on the variance or do you just adjust the general ledger and move on?  An outside company can work as a team with your staff to conduct the physical and get to know the current procedures to determine of controls need to be tightened.  Typically most parts physical companies have experience in parts, accounting and DMS.  This can come in handy if any discrepancies arise between the parts pad and the accounting general ledger.

Are you worried about the expense of an outside inventory company?  The reality is that most inventories are completed in 6 to 8 hours and cost far less than you might imagine. As an added value, parts inventory companies typically include consulting services with the cost of the inventory.  Many times implementing just one of these ideas can pay for itself over time.

Looking for a reputable parts physical inventory company?  Be sure to ask your accountant.

Jennifer Enck

The biggest cause of parts inventory obsolescence is most commonly found to be a lack of controls in place for special order parts.  In our travels to various dealerships we have seen many different ways these part orders are handled.

The following are few best practices we have encountered that are currently in use by various parts departments around the country:

• Weekly monitoring of special orders.
• Return aging special orders if they have not been prepaid.
• Always keep special order parts in a segregated area away from regular inventory.
• Have customers prepay for special order parts.
• Set up a future appointment to install the ordered parts at the time the order is placed.
• Always consider CSI before doing a special order.  Are you able to buy the part from a local dealer to speed up the process and prevent a CSI nightmare?
• Place a static cling sticker with the expected arrival date on the customer’s windshield to remind them there is a part on order.
• Do a monthly physical of special order parts and review the physical with the service manager.
• Use a designated multi-part order form.
  a) A copy of the original to the customer at time of order.
  b) A copy to service advisor when part arrives so they can call customer.
  c) A hard copy to mail to the customer when part arrives.
  d) Two copies for the parts department – one for receiver and one for counterman.

Implementing some or all of these practices can be done quickly and painlessly.

How many of these controls do you currently have in place at your dealership?

Jennifer Enck

On May 28, 2010, The Federal Trade Commission announced it will delay enforcement of the Red Flags Rule until December 31, 2010.  If Congress passes legislation with an effective date earlier than December 31, 2010, the FTC will begin enforcement as of that date.

The enforcement of the Rule had been previously delayed until June 1, 2010.  The FTC has delayed the enforcement once again so that Congress can consider legislation that would affect the scope of entities covered by the Rule. 

Last year the American Bar Association (ABA) filed a lawsuit against the U.S. District Court for the District of Columbia seeking to not be included in the Rule.  This case is currently pending in the Circuit Court.  The American Institute of CPAs (AICPA) also filed a lawsuit on behalf of its members in November of 2009 claiming that CPAs in public practice should not be subjected to the Rule.  AICPA members were granted a 90-day grace period from the date on which the Circuit Court renders and opinion on the ABA case.

The Red Flags Rule has been in effect since January 1, 2008 under the Fair and Accurate Credit Transactions Act.  “The Rule” requires all creditors and financial institutions to address the possibility of identity theft in their businesses.  These entities are required to implement an Identity Theft Prevention Program (ITPP) to help identify, detect, prevent and mitigate identity theft.

For more information on The Red Flags Rule please see our blog article dated September 1, 2009.

In addition, the Federal Trade Commission continues to provide materials on The Red Flags Rule through its website.  Here you can find a compliance guide as well as a template to identify risky areas tailored to your specific business.  To obtain this information, visit the FTC website at www.ftc.gov/redflagsrule.

The National Auto Dealer Association (NADA) has also published a guide to assist dealers in implementing their programs.  Visit www.nada.org and search for NADA Guide to Red Flags, Product Code L50.

Jennifer Enck

There has been much debate on the Senate Wall Street Reform Bill (S. 3217).  The bill would create a Bureau of Consumer Financial Protection (BCFP) to regulate most financial products in an effort to protect consumers from situations such as risky lending. 

In the initial language of the bill, automobile dealers were being corralled into the same group as banks and lenders.  The bill could ultimately tell dealers what financial services they can offer to consumers, how they can offer them and the level of compensation that can be received. 

On April 27, 2010, more than 100 dealers arrived in Washington to deliver a message to their Senators and show support for an amendment to the bill being offered by Sen. Sam Brownback (R-Kan.).  The Brownback Amendment would exempt dealers except for “buy here, pay here” dealers from the BCFP regulation.  Dealers would continue to be regulated by the Federal Trade Commission (FTC), the Federal Reserve and state consumer protection statutes that are currently in effect.  The point being driven by The Brownback Amendment is that financial reform legislation should focus on what led to the economic crash and not as a way to increase unnecessary regulation on small business owners.

On May 24, 2010, the Senate passed the Brownback motion 60 to 30.  Key points in the language of this amendment stress that auto lenders and auto loans would be regulated by the BCFP and that dealers are not auto lenders and should not be included in the regulation unless they are a buy here, pay here institution.  Dealers will continue to be regulated by the Federal Trade Commission (FTC), state agencies and the Federal Reserve.  The language is pro-consumer and aims to preserve affordable auto financing options for all car buyers.  This bill now proceeds to negotiations between the House and Senate.

Jennifer Enck

On May 18, 2010, a temporary sales tax increase was approved by Arizona voters under Proposition 100. 

On June 1, 2010, a 1% sales tax increase will go into effect for the State of Arizona raising the state tax from 5.6% to 6.6%.  This tax increase will stay in effect until May 31, 2013.

The Arizona Transaction Privilege Tax is imposed on the vendor not the consumer.  If your business does not collect the additional 1% tax from your customers you will still be required to remit the proper tax to the Arizona Department of Revenue starting on the June 2010 TPT-1 which is due in July 2010.  The accounting credit will still be applicable to the State Transaction Privilege Tax and will still not apply to city, county or other taxes.  The amount of the accounting credit also remains unchanged.

The current Arizona TPT-1 form will continue to be the form required to remit Transaction Privilege Taxes and there will be no changes to the form.  If you are a quarterly filer, your activity from June 1, 2010 through June 30, 2010 will be reported on one row and your activity from April 1, 2010 through May 31, 2010 will be reported on a second row.  Annual filers will be required to remit in a similar fashion.

Additional information is available at www.azdor.gov.

 Jennifer Enck

LIFO (last-in-first-out) is an inventory valuation method, recognized by the Internal Revenue Service since 1939, which is used for financial statement purposes and to determine the tax liability of an entity.  This accounting method assumes inventory acquired last is the first to be sold, hence, last-in-first-out.  For certain businesses, LIFO is the most accurate way to measure the financial condition and report net income.

During periods of inflation, LIFO will typically result in a lower value of inventory which allows dealers to lower their tax liability for a period of time.  However, this may only be a temporary advantage.  The benefits of LIFO will be lost when the dealership is sold or the entire inventory is liquidated.

There have been a series of proposals during the past five years to change or repeal LIFO which would tax the recorded reserves.  It may also increase business taxes because the companies will no longer be allowed to use LIFO to protect themselves from rising inventory costs.  If LIFO were to be repealed, it would be the equivalent of a company selling all of its assets, receiving no cash, but having to pay tax on the sales.  The LIFO repeal will provide a windfall tax to the government at the expense of small business owners throughout the country. 

Your tax advisor can help you determine the potential impact of LIFO termination and help you setup a plan to alleviate some of the pain.  In the mean time, contact your local Congress person and tell them not to pursue the LIFO appeal.

Barbara Smith, CPA and Amber Powell

There has been much debate over SB 1070, the Support Our Law Enforcement and Safe Neighborhoods Act which Arizona Governor Jan Brewer signed into law on April 23, 2010.

As debate rages on and Arizona faces tough criticism and possible boycotts as well as two federal lawsuits, it is easy to lose focus on the law itself.  Employers must keep in mind that there will be requirements and actions an employer must take when SB 1070 becomes effective on July 28, 2010.

The Legal Arizona Workers Act of 2007 states that all business owners risk losing their state and local licenses if they knowingly or intentionally hire undocumented workers.  It also requires all Arizona employers to use E-verify, the online employment eligibility verification program.

The law amends LAWA requirements of the use of E-Verify.  Employers will now have to keep a record of each verification for either three years or the duration of the worker’s employment, whichever is later.  E-verify currently requires employers to record the case verification number on the Form I-9.  It is unclear if simply writing the number on the Form I-9 will be considered a “record”.  Also, under Federal law, employers are required to retain I-9s for three years from the date of hire or one year from the date of termination, whichever is later.  If the E-Verify record is written or stapled to the I-9 and the I-9 is destroyed after three years per Federal law then the employer will be lacking the proof that is required to be retained for Arizona law if the employee is working for the company for more than three years.  Since there is no wording explaining what a valid “record” is, it is recommended employers err on the side of caution by printing a copy of all E-Verify results and retaining with the employee file.

Employers should also be aware that enforcement will be changing.  SB 1070 provides an “entrapment” affirmative defense which suggests state and local law enforcement agencies will begin undercover investigations of employers.  The burden of proof will fall back on the employer to prove that agents urged them to commit the violation.

In an effort to discourage persons from hiring unauthorized day laborers, another provision makes it a Class 1 Misdemeanor for any occupant of a motor vehicle to stop on a roadway to hire and pick up or attempt to hire and pick up passengers for work at a different location, if the motor vehicle impedes traffic movement.  This will apply whether or not the passengers are legally authorized to work in the U.S. or not.

As the debate continues, make sure your human resource department is aware of these changes.  It is also a good idea to do an I-9 self audit to ensure all documents have been properly completed.

Jennifer Enck