When Hurricane Sandy hit the East Coast on Oct. 29, a tide of auto dealerships in New Jersey, New York, Connecticut and elsewhere shut their doors temporarily — some for days, some for weeks. In mid- November, Toyota announced that 15,000 new vehicles were damaged during Sandy at its East Coast franchises. Other manufacturers soon followed suit with their grim damage estimates.
The National Automobile Dealers Association (NADA) is waiting for insurance claims to settle before it estimates total dealership damage caused by the storm. But the dollar loss for damaged product, ruined property and business downtime will likely be in the millions. These huge losses, and the picking-up-the-pieces scenarios that followed Sandy, should motivate all dealers to evaluate the plans they have in place to deal with a disaster.
Under the planning umbrella
Disaster planning is a large umbrella — here are some of the actions required to prepare for a catastrophe:
Form a disaster planning team. If your dealership doesn’t already have a disaster planning team that represents all areas of your operation, it’s time to assemble one. This group will create, review, assess and modify your disaster plan. An executive should be appointed to lead the group — remember, the stakes are high.
Imagine the worst. As the team sets out to draft a disaster plan, it should identify the types of disasters your dealership might face, such as a fire, flood, hurricane or earthquake.
What kind of damage could be caused by these catastrophes? Destruction of your store’s computers that link you to customers and your manufacturer? Building damage and power outages that would prevent auto buyers from entering your showroom? Also take into account the inventory you could lose, including new and used vehicles and parts and equipment.
Aim for continuity. The longer your store stays closed after a disaster, the more money your dealership will likely lose. Business as usual will be put on hold and new opportunities may be missed. For example, vehicle owners who lost their cars and trucks during Sandy would have been unable to replace them through your dealership if it stayed closed after the storm.
Prioritize data recovery. Again, imagine the worst possibilities. If certain types of data were lost — for example, customer sales, service and billing information — how would your operation be affected? What kind of data security breaches could occur? Your plan should cover both pre- and post disaster requirements, including:
- Backing up your data regularly on disk or other electronic media
- Acquiring, or having available, a “cold site” — a location where you can store hardware and software to run the latest backups of your system
You also might want to investigate “cloud computing”: You buy your software and data storage from outside providers, who, in turn, deliver and maintain your software and data through the Internet. In theory, a disaster would be of little or no consequence as far as your dealership’s data is concerned.
Study your insurance policy. Your disaster planning team should know your general casualty insurance policy inside and out. Does the policy cover one or all of your stores? What’s the deductible amount for claims? What’s the maximum dollar amount that will be reimbursed? You’ll need to determine whether you have enough coverage to replace lost assets and, if necessary, restore or rebuild your dealership.
The disaster planning team also should look into business interruption insurance. Typically, these plans help cover employee payroll, rent and utilities, and lost profits.
Keeping in contact
Communicating with employees is the cornerstone of any disaster plan. Your plan should outline specific contact procedures that employees will follow if a disaster strikes. For example, make sure that you have current e-mail addresses and phone numbers (including cell numbers) for all of your employees. Accounting for their employees was the first job that many companies performed after Hurricane Sandy.
Your e-mail system will also become a crucial tool for communicating with customers and vendors in a disaster. Be prompt in e-mailing information to them about how your dealership is operating during the recovery period.
A living document
Your disaster plan should be a living document that is reviewed at least annually and updated as needed. It’s a good idea to get feedback on the plan from your outside advisors to make sure it’s as comprehensive as it should be.
Chart your course in the right direction
The economic environment that influences your dealership’s success has changed dramatically over the last several years. During the worst of the recession, your business likely focused on the here and now: surviving and reaching an acceptable level of profitability.
Now, as the environment for selling cars and trucks continues to improve, it’s time to pay more attention to your dealership’s future. You can do this by revisiting your business plan — or, if you haven’t had a plan, creating one — and determining the best road to greater profitability and future growth.
A compass of many uses
A business plan is a management tool that maps out your dealership’s future by setting goals and then charting a route to reach them. Your business plan also can serve other purposes.
For example, factory field representatives and lenders view auto dealers with formal plans as more organized, less risky business partners. And, with manufacturers looking to constrict their franchise networks and lending still tight, a formal plan may give you a leg up on the competition.
If you haven’t formalized your 2013 plan by now, it’s not too late to start. The year end performance recap from your factory field rep in January or February provides a good starting line for business planning.
The heart of your plan
The type of plan and level of detail may vary depending on your dealership’s size, its goals and with whom you plan to share the information. Most plans include a forecast of future performance presented in a format similar to that of the dealership’s financial statements.
In other words, you should have a projected balance sheet, income statement and statement of cash flows. You may not realize it, but these three financial statements flow into one another. Increases in planned equipment expenditures, for example, will affect all three statements.
What you expect to happen
Your forecasts will be driven by a number of assumptions. For instance, based on market trends, you might expect warranty service to decrease 10% due to better built vehicles. You also might assume cash deficits will be covered by draws on your credit line, which could potentially increase interest expense.
Excel spreadsheets often are used for busi- ness planning. They enable you to change one assumption and then see how that change filters through the three financial statements. But it’s imperative that your assumptions be reasonable. You can assume, for instance, that you’ll sell an average of 50 used units per month. But if the most you’ve sold recently is 30 per month, does your assumption really make sense?
Some plans also include a sensitivity analysis, which identifies the variables with the biggest effect on the bottom line. Others provide three scenarios — best, worst and most probable cases — to give the plan greater perspective.
If you expect managers, lenders or prospective investors to buy into your business plan, include verbiage on your strategic direction, industry outlook, market analysis, anticipated changes in operating efficiency and management team. Be realistic.
A concise, well-written executive summary is another key element of an effective plan. It will grab the reader’s attention, especially when you’re communicating with time- crunched lenders and factory reps.
Once you’ve completed your business plan, what’s next for your auto dealership? Too often owners shove their plans into a desk drawer and fall back into the routine of managing by gut instinct. But you’ll get more mileage if you compare actual performance to your forecasts on a monthly basis.
Identify discrepancies between actual and forecasted results, and evaluate the underlying causes. Perhaps your plan’s underlying assumptions are flawed or overly optimistic. Or maybe some members of your team aren’t following the plan — they may be overspending or underselling. Use your findings to revise your plan, and employee behaviors, going forward.
A learning process
If you treat business planning as a learning process, you’ll gain a deeper understanding of how your store runs. In turn, your forecasts will become more reliable and meaningful. Spot-on business plans impress lenders and factory reps, which may entice them to do more business with you.
The health care act: Getting ready to comply
It appears that the Patient Protection and Affordable Care Act is a done deal, at least for now. Most of its provisions have been upheld by the U.S. Supreme Court. And,with the post-election balance of power in Washington remaining roughly the same, repeal anytime soon is highly unlikely. So here’s a look at some things auto dealerships should do to prepare, because some requirements take effect this year or in 2014.
Meeting withholding requirements
The first thing to figure out is whether the additional 0.9% Medicare tax withholding requirement that goes into effect this year will apply to any of your employees. The requirement doesn’t kick in until the point during the calendar year at which an employee’s pay exceeds $200,000.
The $200,000 amount doesn’t include the employee’s income from any other sources. Nor does it take into account his or her tax filing status. One consequence: You may be required to withhold the additional Medicare tax from wages paid to employees who aren’t ultimately liable for the tax — for example, because their wages, together with those of their spouse, don’t exceed the $250,000 threshold for joint filers.
An employee (including yourself) can’t ask your dealership to stop withholding the tax. Instead, if an employee ultimately doesn’t owe the tax, he or she can claim a credit for the withheld tax on his or her income tax return for the year.
Adding up your FTEs
Does the act’s requirement to provide adequate health insurance (coverage that satisfies minimum essential benefit requirements and qualifies as affordable) beginning in 2014 or pay a penalty apply to your dealership? Well, that depends. If you had 50 or more full-time-equivalent employees (FTEs) in the previous calendar year, you’ll be considered a “large” employer — and the answer may be “yes.” Here’s how to compute your FTE total:
- Count your full-time workers — employees who work 30 hours or more per week, excluding seasonal employees who work fewer than 120 days per year.
- Convert your part-time workers to FTEs by dividing their total monthly hours by 120.
- Add the two figures above.
Let’s say that 45 full-time employees work at your dealership, as well as 10 part-time employees who each work 80 hours per month. Total monthly hours for part-time employees are 800 (10 × 80). Dividing 800 by 120 equals 6.7 FTEs, for a total of 51.7 FTEs. You would be a large employer. But there is an exception: If your number of FTEs exceeds 50 on no more than 120 days during the preceding year, your dealership won’t be considered a large employer.
If your dealership is near that 50 FTE threshold, you may have some options that would keep you under it. For example, you might be able to shift work to a seasonal worker — one who works fewer than 120 days per year — or an independent contractor.
Understanding your choices
If you’re a large employer, you’ll owe a penalty only if you have an employee receiving
a premium tax credit. Premium tax credits are available to employees who meet certain income requirements and are without access to adequate employer-provided health insurance.
Basically, you have two choices if your dealership is a large employer and at least one employee receives the credit: You can provide employees with adequate health insurance in 2014, or you can pay the applicable penalty.
The penalty for not providing insurance is $2,000 per full-time employee (not per FTE) excluding the first 30 employees. So, if your dealership employs 45 full-time employees, the penalty would be $2,000 × 15 (45 – 30), or $30,000. The penalty for providing inad- equate coverage is $3,000 for each employee who receives a premium credit or, if less, $2,000 per full-time employee.
If you already offer health insurance, the new requirements may have little effect on your dealership. But if you don’t or your coverage is inadequate and you’re a large employer, you may have some substantial new costs for initiating or improving health coverage — or face tough penalties for not doing so. Discuss your particular situation with your CPA and be prepared for the changes poised to take place.
Dealership websites need improvements, survey says
U.S. drivers indicate that auto dealerships have a long way to go in providing the online information and digital tools that would make online car buying seamless, according to a recent study by Accenture, a worldwide management consulting firm. And nearly all (94%) of these respondents indicated they’d consider making their entire vehicle purchase online — including financing, price negotiation, the back office paperwork and home delivery — if the online process were easier.
According to results of the digital marketing survey, which polled 1,000 drivers, respondents would like dealerships’ websites to provide:
- A way for car shoppers to compare additional options within the same automaker’s product line (95%)
- Easier and clearer pricing (91%)
- A simpler way to configure a vehicle (88%)
- Access to more simplified information (74%)
- The ability to chat online with a dealer (70%).
Additionally, 79% of respondents thought that the auto sector was lagging behind other retail sectors in the use of digital media tools, such as video and 360-degree website tours. Of those who said they research vehicles online before buying, 89% said they had to visit six websites or more before getting the information they needed. And 33% said they had to browse more than 20 websites to get the data they were after.
Watch out for “drip pricing” in your advertisements
Auto dealerships are being cautioned to have all of their advertisements reviewed for compliance with applicable federal and state advertising standards. The regulatory affairs office of the National Automobile Dealers Association (NADA) recently distributed an e-mail reminder following warnings by the Federal Trade Commission to 22 hotel retailers about the prohibited use of “drip pricing.”
The FTC defines drip pricing as “a pricing technique in which firms advertise only part of a product’s price and reveal other charges later as the customer goes through the buying process.” The additional charges are sometimes portrayed as “convenience” or “service” fees and can include mandatory charges for optional upgrades and add-ons.
Some auto dealerships may have engaged in drip pricing by, for example, failing to disclose in their advertising internal administrative fees or fees to file state paperwork that they impose. The FTC letters to hotel retailers encourage the companies to review their websites and ensure that their ads don’t misrepresent the total price consumers can expect to pay.
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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. ©2013 DLRma