If someone asked you how you use your daily operating control report (or “DOC”), would you roll your eyes and think, sadly, of its lim- ited use, because you really can’t rely on its numbers? Many dealership owners say their stores’ DOCs aren’t dependable enough to use for business evaluation and planning — mainly because data in the reports isn’t as current as it should be.
If this sounds like your dealership, brighten up. You can greatly improve the functionality of your DOCs by setting up process controls throughout your organization.
Do you read your “dashboard”?
The DOC that your dealership compiles daily for your manufacturer is a 24-hour summary of the financial metrics that drive your business. This “dashboard” for your operation can help you and your department heads keep a close eye on performance and make adjustments quickly to enable your store to meet its weekly, monthly and annual financial goals. The DOC typically makes the rounds midmorning, after it’s generated by accounting personnel.
Your DOC can provide a wealth of information on cash receipts and disbursements, as well as on revenue and expenditures. For example, here are nine of the nearly 200 lines on the report used by one franchise: total dealership gross, new front end gross, used front end gross, service labor gross, parts gross, selling expenses, operating expenses, overhead expenses and operating profit (or loss).
What’s the problem?
While the management potential of DOCs is high, many dealership owners complain that quirks in their computer system processes — and staff habits — impair their usefulness. They say that the numbers aren’t always up to date because of delays in F&I processes and accounting entry.
In reality, many receipts and expenses aren’t recorded on the day they incur. And, if the parameters in your dealer management system (DMS) aren’t properly linked between the F&I module and the Accounting module, the gross profits on car deals will be inaccurate in the DOC and other management reports.
What’s the answer?
Don’t be discouraged. The secret to a good DOC isn’t magic, it’s discipline — data collection needs to be rigorous and on a near real-time basis. Give special atten- tion to your expenses because they can be grossly understated if they’re not entered into your DMS on the day you’re billed or as soon as the charge is known.
Consider taking the following actions:
- Evaluate your current controls by having your accounting department head interview every department head to determine where the weak spots are and how to remedy them.
- Set an agreed-upon time for the F&I department to finalize car deals for office processing — for example, a deal must be completed and in the office by 7 a.m. the next day in order for it to be posted and show up on the DOC.
- Set an agreed-upon time that the account- ing office will have all car deals posted for the prior day — for instance, 10 a.m.
- Establish controls in each department so that every bill and receipt is entered on the same day it’s available — if this isn’t possible for an expense, have the account- ing department post it off the purchase order and then adjust the expense when the bill arrives.
- Have the accounting department review the DOC regularly to ensure any new gen- eral ledger accounts have been updated in the DOC.
Also appoint a go-to person whom anyone involved in collecting and entering data for the DOC can contact with computer-related questions.
Making it work
Having a DOC you can rely on requires 100% commitment from everyone involved in the data collection and entry processes. Your CPA can work with you in establishing process controls to make sure that this goal is reached.
The IRS’s new tangible property rules
The IRS has issued new rules on when tax- payers must capitalize — and when they can deduct — amounts paid to acquire, lease, pro- duce or improve tangible property. Tangible property includes your dealership’s building, machinery, furniture, equipment and vehicles. Issued in December 2011, the new regulations apply to 2012 and future years.
The rules provide a general framework for cap- italization. They also revise some of the provi- sions previously proposed by the IRS, including those on how to determine whether a unit of property has been repaired or improved. Costs that qualify as repairs are deductible, while improvement costs must be capitalized.
More capitalization may be required
An improvement to a building takes place if there has been a betterment, restoration or
adaptation of a property unit. Under the new regulations, the unit of property for a building consists of the building and its structural components.
In determining whether an expense is for a building improvement, the regulations require the taxpayer to apply the improvement separately to the building structure and any of the specifically defined systems, such as the heating, ventilation and air conditioning (HVAC) system, plumbing system, electrical system and security system. In other words, the improvement standards no longer can be applied to the building in its entirety.
So, you must treat a cost as a capital expen- diture if it results in an improvement to the building structure or to any of the enumerated building systems. This standard is likely to mean more capitalization. For example, costs such as replacing all bathroom fixtures could now rise to the level of being a major component of the plumbing system and require capitalization.
But there are pluses
The regulations include provisions that expand the definition of “dispositions” to include the retirement of a structural building component. This may be particularly helpful in light of the dealership re-imaging projects currently required by some auto manufacturers.
Now when you dispose of a structural com- ponent of your dealership building (such as windows or tile flooring) before you dispose of the entire building, you can immediately recognize a loss on that structural component. This means that, for example, old building facades and gutted interiors can be written off for a tax deduction. The regulations allow reasonable estimations.
Other tangible property
The regulations provide a safe harbor to deduct certain routine maintenance costs for tangible property other than buildings. An activity isn’t considered an improvement if the taxpayer expected to perform it as a result
of his or her use of the property to keep the property in its ordinarily efficient operating condition. The activity is considered routine if, at the time the property was placed in service, the taxpayer reasonably expected to perform the activity more than once during the prop- erty’s life. Replacing car tires, for example, would be considered routine maintenance.
The rules provide a general framework for capitalization.
Capitalization related to the restoration of property will now be measured by whether the replacement component is a “major” component: that is, a large portion of the unit of property or a portion that performs a discrete and critical function. Unfortunately, this subjective definition doesn’t help taxpay- ers looking for safe answers.
How it applies to you
The new rules also address materials and supplies, a de minimis rule for expensing and more. Contact your CPA to see how the new rules affect your tangible property expenditures.
How alive is your code of ethics?
Ethics. Merriam-Webster defines this as a set of moral principles, a theory or system of moral values, a guiding philosophy, or the principles of conduct governing an individual or a group.
When it comes to personal ethics, people’s philosophies and conduct vary greatly. So when it comes to ethics at your auto dealer- ship, where do you turn for guidance? And how do you make sure ethical practices are followed at your store?
Following a national model
If you’re a member of the National Automobile Dealers Association (NADA), you’re likely familiar with that organization’s code of ethics. NADA requires its members to fully comply with all federal, state and local laws governing their businesses and to pledge to:
- Operate the dealership in accordance with the highest standards of ethical conduct
- Treat each customer in a fair, open and honest manner and fully comply with all laws that prohibit discrimination
- Represent products clearly and factually, standing fully behind war- ranties, direct and implied, and in all other ways justifying the customer’s respect and confidence.
Other parts of the code set ideals for advertising, repair work and written service estimates, resolving customer concerns, and other matters.
Adhering to broad principles
As with NADA’s code of ethics, state codes are typically broad and all-encompassing. For instance, the Washington State Independent Auto Dealers Association states that members have “a general duty of integrity, honor and fair dealing toward the general public.” Another example: The Alabama Independent Automobile Dealers Association holds that it “will not perform any act which would bring disrepute” to the industry.
So, you may ask, how exactly do these ethical ideals translate to dealer interactions with the single woman who wants to buy a reliable used car for $5,000, the father of a large family who wants to finance his new SUV for five years, or the grandmother who wants to get rid of that “clanging noise” she hears under her sedan’s hood? Fortunately, there is more detailed advice.
In addition to its code of ethics, NADA pub- lishes an “Ethics Guide,” which covers four areas of a dealership’s operation: advertising, financial services, sales and service. First, the guidelines stress that dealers should abide by local, state and federal laws relating to auto dealerships, including the Truth in Lending Act. And the guide presents more detailed guidelines for ethical behavior in each opera- tional area. For example:
- Sales personnel should “provide each cus- tomer with a thorough and clear explana- tion of the steps involved in the purchase or lease of a vehicle and follow those steps diligently.”
- Financial services guidelines dictate that employees must fully disclose to customers “the costs, terms and contractual obliga- tion of credit and lease transactions,” and that documents be written in “a simple, plain and unambiguous manner.”
- Service guidelines require that dealerships, when appropriate, recommend corrective and maintenance services, “explaining to the customer which of these are required to correct existing problems and which are for preventive maintenance.”
As you review the day-to-day activities of your employees under an ethics microscope, you’ll likely see areas where procedures should be put in place to support guidelines such as the ones described above. State and federal laws will prompt some of the proce- dures. And you may find a need to set addi- tional rules.
What if, for example, you have concerns about how service personnel describe repair estimates to customers? You could establish a procedure whereby customers sign a store copy of their repair estimate.
Once you have a code of ethics and related procedures in place, you’ll need to train your staff. Outside trainers can be a good source of expertise in areas with compliance considerations and ethical overtones, such as presenting finance and insurance options to customers. Or you may prefer to develop your own in-house training program.
Keep it simple
In-house ethics training need not be complex. One tried-and-true technique involves sitting down and talking to your managers. Have them share stories about real-life ethical situations that have come up over the years.
Select a trainer — someone from your top ranks who has perhaps gone through ethics training him- or herself — who can relate those stories to your trainees and have them discuss how they would have handled the situation. Then the trainer should comment on what would be considered ethical behavior by the dealership and what would be viewed as unethical behavior.
Ethics in any organization starts with the “tone at the top.” Involvement and support by management is essential to a strong ethics program.
Review your code of ethics and related procedures today — and begin to develop these process controls if you’re lacking them. Your CPA can assist you in creating proce- dures that will deter employees from acting unethically — and help your dealership build the respect from customers that it deserves.
Dealers wary of costs for facility upgrade programs
Auto manufacturers need to do a better job presenting a business case that improve- ments sparked by their facility image pro- grams will have a positive effect on dealer- ships’ bottom lines, a recent study by the National Automobile Dealers Association (NADA) indicates.
According to NADA, the study results (released in February) show that program costs can be excessive and the value of the programs “weakly demonstrated.” NADA further concludes that these “factory image programs,” which typically involve standard- izing and modernizing stores, may fall short in preparing automotive retailers for the future evolution of the industry, in which online shopping — rather than visits to a dealership — will play an enormous role.
NADA Chairman William Underriner said in April that the association has received mixed reactions from automakers about the study conclusions, ranging from highly receptive to resistant.
Dependent care tax breaks for employees
You can provide certain fringe benefits to your employees at little cost. One of these is dependent care assistance.
A dependent care Flexible Spending Account (FSA) allows employees to contribute wages pretax that can be used to pay — or reimburse the employee for — eligible dependent care expenses. Generally, an employee can contrib- ute up to $5,000 each year.
Eligible dependents are generally members of the employee’s household who receive more than one-half of their total support from the employee. That includes an employ- ee’s dependent children under age 13, the employee’s spouse if he or she is unable to care for him- or herself due to physical or mental disability, and elderly individuals who meet certain requirements.
Employees who choose to participate in a dependent care FSA should estimate their dependent care expenses for the coming year carefully and obtain reimbursable ser- vices by Dec. 31 of each year in which they participate. Any funds not used for the year’s expenses are generally forfeited.
Employees also should compare FSA ben- efits to those of the child and dependent care tax credit, which will reduce an eligible employee’s tax bill dollar-for-dollar. Expenses eligible for the credit are limited to $3,000 for one dependent, $6,000 for two or more. Income-based limits reduce the credit but don’t phase it out altogether.
If you’re considering offering dependent care FSAs to employees in 2013, now’s the time to get your ducks in a row. Open enrollment for these programs is in November, for a Jan. 1 effective date. New employees may enroll in the program within 31 days of their date of hire. Plan participants must re-enroll each year.
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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 DLRja12