Business Management Consultant
The Challenge
Meeting with the Retail Operator (RO) and asking him to explain his view of the current issues it became clear that he had been trying to address the issues without really identifying the key causes of the issues.
The problems were summarised as:
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Loyalty by the RO to long service staff whose current attitude did not justify the loyalty given by the RO to the staff.
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The RO stated that the Bank had reduced the overdraft limit with no notice. In fact they had written to him and had phone conversations warning him that the business needed to improve or they would be taking their own “corrective” action to secure their funding line.
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He also showed that the Finance Company had increased the deposits on used cars, increased the interest rate and reduced the credit lines.
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The debtor’s ledger had a large amount of aged debt whilst there were creditors who had not been paid for many months and who had put the business “on stop” and threated legal action for recovery of their debts.
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Losses were being incurred, even in the “bonus months” of March, June, September and December.
The Initial Review
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The RO and I worked together to analyse the balance sheet to understand why the bank and finance company had taken the action they had. It turned out that the liquidity ratio was 0.9:1 (current assets divided by current liabilities which should be at 1.1:1 or above) and the Equity Percentage had reduced to 9% (the recommendation is that this ratio should be at 20% or above).
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The cash was under pressure due to both the losses as well as the lack of debtor control which had the knock on effect that they could not keep up with the trade creditors.
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The department profitability did not match anywhere near the national average showing on the manufacturer composite.
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The staff structure was in need of a review in order to ensure the return on staff met the expected averages. For example, the annualised retail new and used sales per sales executive were about 35 units lower per sales executive and the hours per technician were about 150 hours per technician lower than the national average.
The Actions
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The overriding importance of working within the current scale was emphasised to the RO which meant that a steady plan had to be designed to accommodate the cash shortage while actions had to be devised to address the cash generation and cash management.
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An urgent meeting was convened with the credit controller to give her a targeted number of accounts to chase. These were based on what she could handle effectively within the limitations of her part time hours as well as a mixture of current and older debts.
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A spending limit was put on the parts department so that purchases were made for urgent items, including warranty and safety related parts, but the parts manager had to refer to the RO for permission to exceed the spending limits.
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The purchase ledger analysis included the requirement for a list of suppliers who were needed for the business to function but who were overdue for their settlement. The Purchase Ledger Administrator contacted as many as they could from this list to make arrangements for payments to be “smoothed” but with the assurance that any arrangement would be honoured.
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The car sales department was asked for a list of deliveries by date. These vehicles were then rescheduled for delivery so that the cash effect of paying for the vehicles before they were sold was smoothed.
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Most important was the fact that there had been no cash flow forecast. This was corrected very early on. The accountant had never been asked for a forecast of cash as he provided a daily bank balance figure to the RO. Clearly, this did not take account of large debits being expected during the next few days and often without any warning from the accountant despite various statements being received that gave the date that the debit would be made. In the case of vehicles, this had to be tied into the delivery schedule.
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All of this showed that the key personnel in the Accounts Department had little communication with the managers of the business and equally there was no trust by the managers that the accounts personnel knew anything about the business. This had to be corrected quickly with me chairing meetings between the various finance staff and the managers. The trust took time to build.
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The staff structure was reviewed to ensure that there were the right numbers, skills and attitudes present in each department. Again, this process took time as some staff did not want to be part of the change and so left. The recruitment of replacements had to be carried out in a formal way using a scoring system based on required factors for each job and, inevitably, this took some months to complete across the business. There were also some little victories where cynical staff actually understood that urgent change was needed and they were enthusiastic to be a part of the change.
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After 4 months of work we presented our recovery plan to the bank and to the finance company to explain that we had recognised why they had taken the actions they had.
The Outcome
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Over a period of 12 months the business went from being under serious stress from within as well as from third parties to a position of having implemented some good controls, including the cash flow forecast and the operation of a showroom system where all the staff knew the importance of accounting for their individual activity and to develop the customer database by logging the enquiries.
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The cash position improved dramatically from where it had been and the disciplines of, for example, a weekly debtor ledger review meeting paid dividends in terms of cash generation as well as identifying late payers.
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Supplier’s faith began to be restored although there were some who, once they had recovered their money, vowed never to deal with the business again.
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A monthly management meeting was introduced using a table of business critical key performance indicators where the profit performance and expense control was examined in the department management accounts together with the stock profile, stock levels, stock turn and stock value. This made the managers very accountable for their part of the business.
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The bank and finance companies began to loosen their grip on the business although this took two years before they felt the results justified, in the case of the finance company, restoring the deposit levels and interest charges to their former levels.
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The staff worked well together and the new staff integrated very quickly and brought to the business some of the disciplines that they had been used to in their previous employment.
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The balance sheet became stronger through the tighter controls on stock, debtors, creditors and, most important, cash. This in turn gave some confidence to the bank and the finance company that the business was trading from a more secure footing than had been the case.
The Conclusion
The dealership is, today, not only profitable but has also expanded by taking an additional franchise in a separate site. This expansion was with the support of the bank and the finance company.
The project to turn the business from a cash short and loss making business to a consistently profitable (1% return on sales) business took about 12 months but with some big victories along the way.