Good benefits continue to help attract and retain good employees, and retirement savings plans are one of the biggest carrots you can offer. Perhaps your dealership is considering setting up a new plan or changing its plan. Let’s review one of the most popular retirement savings plans — the 401(k) — to help you get started.
The king of retirement plans
The most popular type of retirement savings plan is the 401(k), which most small and midsize businesses find affordable. Under this defined contribution plan, employees contribute a portion of their pretax salary into the plan each pay period. For 2012, employee contributions are limited to $17,000 — $22,500 for taxpayers age 50 and up.
The 401(k) plan gives the employee a variety of investment options — such as mutual funds, bond funds and money market funds. Employees typically make their investment choices online and generally can change their choices at any time. Plan earnings aren’t guaranteed, and earnings (or losses) will vary depending on the performance of the investments selected. Employees can opt out of contributing to the plan at any time.
Perhaps the biggest advantage of a traditional 401(k) plan is tax-deferred compounding; participants usually aren’t taxed until they withdraw plan assets. Usually this is at retirement. With a few exceptions, employees must begin to withdraw “required minimum distributions” starting after age 701⁄2 or face a penalty equal to 50% of the amount they should have withdrawn.
Perhaps the biggest advantage of a traditional 401(k) plan is tax-deferred compounding.
An employee can withdraw money from a 401(k) before retirement if there is a qualifying event, such as disability or termination of employment. The employee will typically owe not only tax but, if under age 591⁄2, also a 10% early withdrawal penalty on such a distribution. The employee can avoid taxes and, if applicable, penalties, by rolling the distribution into another qualified retirement plan or a traditional IRA.
Your plan also might allow distributions for certain hardship situations. Again, the employee will typically owe tax and, if under age 591⁄2, a 10% early withdrawal penalty. Also, he or she will be unable to make deferral contributions to the plan for six months. Another option is to allow participants to take loans from their plans. This avoids taxes and penalties, but the participant must pay back the loan amount plus interest within a five-year period.
Your dealership will have the option to match the employees’ contributions, and you can deduct any matching contributions you make to the plan just as you would ordinary compensation. Providing contributions can strengthen the 401(k) plan as a recruiting and retention tool.
Making contributions also might allow you to avoid strict discrimination testing requirements that otherwise apply to 401(k) plans. By agreeing to make certain annual contributions to employee accounts, you can create a “safe-harbor” plan, which doesn’t require potentially burdensome testing. Such a plan also ensures that certain “highly compensated” employees will be allowed to make the maximum contributions.
Finally, qualified dealerships can claim tax credits of up to $500 a year for the plan’s first three years to cover start-up and maintenance costs. The credit equals 50% of the cost to set up and administer the plan up to a maximum of $500 per year.
Roth 401(k)s benefit some employees
If you offer a traditional 401(k), you also can offer employees a Roth 401(k). Roth 401(k) contributions are made with after-tax dollars.
The benefit? Participants can generally withdraw funds from the plan tax-free after age 591⁄2. Distributions of contributions are always tax-free, but distributions on earnings are tax-free only for qualifying events. Additionally, the participant must have held the 401(k) account for five years or more.
Roth 401(k)s often appeal to younger employees who expect to be in a higher tax bracket when they withdraw money from the plan. These employees will typically see a higher after-tax investment return than they would with a traditional 401(k).
Roth 401(k)s may also appeal to higher-income employees who may be prohibited from contributing to an individual Roth IRA because of income-based limits. The limits don’t apply to Roth 401(k) contributions.
In addition, although Roth 401(k)s are subject to required minimum distribution (RMD) rules, participants can roll the plan assets into a Roth IRA upon a qualifying event. And Roth IRAs aren’t subject to RMD rules.
Employer matching and profit sharing contributions can’t be made to Roth 401(k) accounts, however. And, with some limited exceptions, employees can’t roll over a traditional 401(k) into a Roth 401(k).
According to the IRS, about half of Americans don’t have retirement plans at work. If you choose to offer employees this valuable benefit, it can help you attract and retain the best employees. But before implementing a plan, consult your tax advisor about how the plan will affect the financial side of your business.
Building the “perfect” inventory
Having the right inventory of vehicles in stock is a bit of an art and more of a science. Make good choices, and you’ll meet your customers’ needs and boost sales. But make some bad choices, and you’ll have units collecting dust on your lot and customers clamoring for models you don’t have.
The bottom line is: Your dealership can’t afford to guesstimate the mix of cars and trucks it should keep in stock. Consider the following strategies as you strive to keep — and replenish — the perfect inventory.
Inspecting the marketplace
The market for cars and trucks varies by geo- graphic area, based on socioeconomic condi- tions and other external factors. Find out what’s selling in your “neighborhood” by reviewing information that’s been collected by your state’s department of motor vehicles (DMV).
Some vendors specialize in compiling this information from state DMVs and then sell- ing it to dealerships in digestible formats. If you’re not already obtaining this type of information, you should consider doing so.
What dealership doesn’t want to know what its competitors are selling and consumers are buying each month? This can be a gold mine of information to help you better understand your market, uncover opportunities to grab market share and make informed stocking decisions.
Finding the right tools
The Cross-Sell Report, offered by Dominion Dealer Solutions, is a monthly vehicle sales and registration report that’s custom-made for each client’s particular market. The report details sales by make, model, owner city, owner ZIP code, seller name and other cat- egories. Customers can set up their reporting area by city, ZIP or county and track specific makes and models.
The Report’s “New Vehicle Market Analysis” might show, for example, that while you sold 14 Model X’s last month, Competitor A sold 66 and Competitor B sold 43 — information that might sway you to stock more Model X’s next month.
And the “Used Vehicle Market Analysis” might reveal that, of the 268 used cars sold in your market last month, 143 were imports, and the top five best sellers were Toyota (28), Honda and Nissan (both 13), Hyundai (11) and Mercedes-Benz (10). As you negotiate trade-in prices with customers, you’ll have a fact-based idea of the demand in your market for these makes.
Looking for quick sellers
After you have data on what’s hot in your area, look within your own dealership and analyze, in detail, which units are selling best. Many stores keep up-to-date spreadsheets on the vehicles they sell each month, show- ing the turnaround time for each sale and the average “turn time” for each model.
It’s also helpful to track the turn time for models with specific features and accessories. You might find out, for example, that it takes your store an average of 30 days to sell a fully loaded Model X. But it takes an average of only two days to sell a stripped down ver- sion of the same model. Use this information wisely — it can be your reality check.
Exploring other resources
Other resources are on the market to help dealerships keep track of their inventory and make the right stocking decisions, including:
- A new smartphone-centric inventory management system produced by RedBumper
- vAuto’s Provision, a used-vehicle inventory management engine
Be sure to explore all the resources that might provide you with useful data.
When it comes to inventory, the lesson is:
Do your homework on what sells in your area. Then, using reliable data and your own judgment, stock cars and trucks accordingly. Always buy what you have the best chance of selling quickly. Know your market.
4 tips for securing financing
With the economy brighter than it was a few years ago, your dealership may be considering applying for a loan to make some improvements at your store — or other investment in your business. But banks and other lending institutions have long memories, and they may be reluctant to lend significant sums to auto dealerships unless they consider the risks to be minimal. Here are four suggestions for convincing a lender that your business is creditworthy.
1. Line up your inventory
First, strengthen your balance sheet. Inventory is a prime source of collateral. You should have a car on the lot for each item on your floor plan loan. Some dealers keep a private stash of vehicles for their personal use or use their floor plan loan as a credit line — either is a major faux pas in the eyes of modern financiers.
Lenders also look at your days-in-inventory ratio. Order the bare minimum stock to keep yourself afloat and identify slow-moving vehicles. Discounts and auctions can help you move metal, if needed. Consider returning extraneous parts inventory to the manufac- turer; some offer refunds (or at least credits).
Then turn to your income statement. Lenders like profitable businesses. Strong inventory management can help you lower variable costs, such as storage and interest expenses.
But fixed expenses — including equipment leases and payroll — should also be pared back where possible.
2. Stockpile the ammunition
Before meeting with your lender, assemble a package of relevant documents, including three years of financial statements and tax returns, detailed lists of used and new vehicles, business plans, and the dealer-owner’s personal financial statements.
Then learn to “lenderspeak.” Know what common terms — such as “debt coverage,” “accounting payback” and “debt-to-equity ratio” — mean, as well as the adjustments the lender customarily makes when evaluating your financial statements.
Lenders, for instance, often use the debt-to- equity ratio to gauge a business’s financial leverage. This ratio is equal to long-term debt divided by equity. Lenders typically use data from the prior fiscal year in the calculation, and they consider lending to a business with a higher debt-to-equity ratio to be risky, especially in times of rising interest rates.
Also important is “debt coverage ratio,” the amount of cash available to service interest and principal on outstanding obligations. Lenders generally are comfortable when the cash available is 1.25 times the amount needed to service debt. So, it’s important to have an understanding of the amount of noncash expenses included in your operations, such as depreciation. Understanding any one-time expenses also can help your case with the lender.
3. Practice good habits
Other ways to “wow” your lender include closing your books by the 10th of the following month, preparing weekly cash budgets and maintaining a minimum current ratio (current assets divided by current liabilities) of 1.2. It’s also good to provide a future projection of the financial health of your dealership. This could include sales forecasts, expense forecasts and future cash flow projections. Be conservative with your projections and have a solid game plan for achieving the results.
Strictly adhering to loan covenants — the financial statement benchmarks set forth in your loan agreement — is critical. Dealers who violate loan covenants automatically default on their loans, unless the bank waives its right to call the loan. And, if you violate a loan covenant, auditors won’t sign off on your financial statements until they’ve received the bank’s waiver.
4. Go for the long haul
A long-term banking relationship can win you points with your lender. If you’ve stuck by your bank in good times and bad, chances are that they’ll do the same for you, especially if you’ve always made timely payments. But if you’ve switched banks in search of greener pastures in the last few years, you may be out in the cold when you need to take on more debt — or when it’s time to renew your existing loans.
Communication is paramount to building your lender’s trust. Lenders reward borrowers who maintain open, honest lines of communication. Never hide deteriorating financial performance. Experienced lenders have been around the block before and can smell “cooked books.”
With the recession still a fresh memory for lenders, securing a business loan isn’t a slam dunk. But a dealership that makes a strong case for its creditworthiness will likely be able to obtain the financing it needs to reach its goals.
Mobile apps and social media hook dealership attention
Auto dealerships are paying a lot of attention to mobile applications and social media, and they’ll continue to focus on these technologies this year, according to a recent survey.
Auto/Mate Dealership Systems, a provider of dealership management system software, conducted the auto dealership technology survey to determine which technologies
are most important to dealerships. Survey respondents (159) included owners and general managers (55%) and other management positions (45%), such as controllers and chief information officers, service and parts managers, and sales managers.
The survey indicated that mobile apps are on the rise: 46% of respondents use mobile apps in their sales department, 31% use mobile apps with their customer relationship management (CRM) system, and 23% use the technology in their service department. Future plans for mobile apps also focus on these areas, with 35% planning to implement apps in the sales department and 32% in the service department in the next year. And 17% plan to implement apps in relation to CRM.
Regarding social media: 81% of respondents personally are on Facebook, 44% are on LinkedIn and 17% are on Twitter. About 70% of the respondents maintain their social media and reputation management programs in-house and 9% outsource to a vendor. Yet, almost one-fourth don’t have a program in place to manage their presence in the social media or their online reputation.
Does your dealership feel overwhelmed by social media and reputation management? New tools, such as SocialMention.com or Kurrently.com, can assist your staff in monitoring online postings or blogs daily.
High hopes for 2012
More than 13.9 million new cars and light trucks will be sold or leased in 2012, predicts Paul Taylor, chief economist of the National Automobile Dealers Association (NADA). Taylor gives three reasons for the cheery forecast: aging vehicles (the average car or truck on the street is now nearly 11 years old), aggressive incentives and affordable credit.
Some economists, including Taylor, predict that interest rates will remain historically low this year, with consumers finding affordable auto loans from competing lending sources. Greater consumer confidence also is often cited as another reason for the projected upswing in car sales.
With the anticipation of increased sales this year, it may be time to revisit — and possibly increase — your advertising allotment if you’ve cut back heavily on your advertising budget in recent years.
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This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use. ©2012 DLRma12