Financial strategy – economic outlook
Max Warburton, Sanford Bernstein automotive sector analyst
The UK’s automotive industry has experienced a lot of pain over the past two years, but it could have been much worse, according to Sanford Bernstein automotive analyst Max Warburton.
He said: “UK consumers keep their cars for an average of seven years, Germans keep theirs for eight and the average in Sweden is 10 years.
“If the UK car market went to Swedish levels and people started putting off their purchase decisions to that extent it could have been so much worse for the automotive industry here.”
Warburton was impressed with how car manufacturers “intelligently handled” the recession by swiftly cutting costs and altering production to match market needs.
European car sales “fell off a cliff” in the third quarter of 2008, but the scrappage scheme has been a big boost for the industry.
Warburton said: “Is it good in the long term? We will start to see the effect in 2010. Mediterranean countries have had scrappage schemes in the past and sales have really suffered once they expire.”
Elsewhere, China and Brazil have shown extra-ordinary growth in 2008 and into 2009.
Fiat is getting 25% operating margins in Brazil, selling Unos there for £15,000. Volkswagen is making big profits in China.
The US has seen a catastrophic fall from 16 million unit sales to 10 million this year.
Warburton said: “The big profit drivers for manufacturers are the larger and sportier cars, but the world is shying away from these models.”
“No one really makes money from volume cars anymore and smaller cars are losing money in cash terms. I think car sales can get back to 2.3 million but it will be with a very different model mix.”
Tactics for putting profit first
Julie Oliver, Mitchell Group financial director
Having the right financial controls in place helped the Mitchell Group achieve a 5.45% return on sales to September 2009.
The controls included ensuring that new members of staff have a session in the accounts department as part of their induction.
“We explain to them that the finance department’s purpose is to check everything that comes through the business and to ‘keep score’,” said Julie Oliver, the group’s financial director.
Timely and accurate management of accounts is key, according to Oliver. “Department managers need to turn into ‘mini accountants’,” she advised. “It’s very important to give information to them.”
Regular meetings are held, including a monthly accounts review with department heads, and reports are run on a weekly basis.
“It’s tedious, but everything has to be invoiced correctly to get accounts out in an expedient way,” Oliver said.
“We’re looking for factual accuracy because if a digit is missing there will be implications down
A carrot-and-stick approach is taken on compliance – the carrot being that sales managers are given a bonus based on the department’s profitability. The stick is that penalties for non-compliance are built into managers’ pay.
“If an item is more than a month old the amount is deducted from their bonus,” Oliver explained. “They do receive the money back, but only when the item has been resolved. It concentrates
The proactive financial director – powering the engine room of the dealership
Barry Cooper, Cooper Solutions managing director
Financial directors (FD) need to create a culture of financial control within dealerships to help drive the business forward and out of the recession.
Barry Cooper, managing director of Cooper Solutions, advised delegates that the accountant is one of the first roles that need to be looked at within a business.
He said: “You need someone that will be the right- hand man to the managing director and not just a safe pair of hands. The decisions FDs make affect everyone in the business and will also impact on customer satisfaction.”
Cooper believes accountants need to be in the engine room of a dealership where the management lead.
He said: “Very often line managers don’t quite feel they’re doing what’s expected of them and it can be financial problems that are holding them back. They’re often not confident enough to ask for help from FDs and that’s where you’ve got to be approachable.”
Dealer staff need to take a collective responsibility for achievement of budget. Cooper admits that might sound basic, but dealers really need to ask of themselves: “Is it working like it should?”
Cooper said: “You reap what you sow and you should plant beans rather than count them. Introduce simple, straightforward controls and a framework for line managers to work to. It needs to be simple enough that when something does go wrong they will be able to easily recognise it.”
Weekly forecasting is also something that sets apart excellent businesses from just the good ones, according to Cooper.
One of the biggest issues that needs to be addressed within dealerships is the problem that just drifts through for months. Cooper believes putting tight financial controls in place will eradicate these problems.
Cooper added: “2010 can be your year. The dealer team need your leadership. You create the culture, processes and the potential.”
Financial fraud – controls to protect your profits
Mark Nuttall, general manager, Experian Automotive
Dealers need to be prepared for the unexpected when it comes to fraud within their business.
That’s the advice from Mark Nuttall, Experian Automotive UK and Ireland general manager.
He told delegates: “Very rarely does a fraudster dress as a criminal in a stripey top, mask and carry a swag bag, so you’ve got to be prepared for the unexpected.
“Male dominated industries are more affected by fraud and it’s got worse as the recession has gone on.”
Insurance related fraud in the UK has risen by 24% during the recession costing £5 million a day. There’s also been an increase in “soft fraud” in the recession with 70% of HR managers saying people lied on their CV.
Nuttall said: “Dealers should make sure they conduct background checks on all potential employees. It’s worth doing this with customers too, and the real differentiator to determine whether customers will pay bills will be found in their recent credit card payment record.”
Another area which is of growing concern for dealers is clocking, which is now even easier to carry out as the devices needed to do it are readily available from the internet.
Nuttall said: “It’s a major issue for potential damage to the retail automotive industry and it’s much easier to clock than it was in the past.
“Twenty per cent of dealer stock isn’t checked for mileage discrepancies.”
Experian has seen that larger dealer groups are taking longer to pay their bills and SMEs are being asked to pay quicker.
Nuttall said: “It’s in these difficult times that business can’t afford to become victims of fraud. A lot of businesses do not even have a contingency plan to deal with fraud and it’s something that needs to be looked at.”
Leasing and contract hire – a funding model for future profit?
Paul Turner, managing director of apd research and development
Franchised dealers are missing out on opportunities in the fleet market, according to Paul Turner, managing director at apd research and development.
He pointed out that rather than de-fleeting cars, around 10% of all contracts have been extended this year, giving dealers servicing opportunities.
“Dealers could have capitalised on this, but the independent servicing sector has come on and grabbed more of that share,” Turner said.
“Leasing companies are looking for cost savings,” he continued. “Independents are getting smarter and producing quality work.”
Some dealers may have been deterred from working with leasing companies in the past because they believe they are very demanding. But Turner suggested that the relationship between dealers and leasing companies is changing.
He said: “Leasing companies require the dealer network more than ever before. That changes the dynamics of the relationship.”
However, he cautioned that the fleet sector is still “ultra competitive”.
“If you get it wrong then you won’t be on their approved supplier list for long,” he warned.
Expense reduction - strategies for success
Ashley Winter, Retail Automotive Alliance
The benefits of small dealer groups working together to get better value from suppliers were illustrated by Ashley Winter, chief executive of the Retail Automotive Alliance (RAA).
The RAA is a buying group with 21 members, all regional franchised dealer groups. Its focus is getting better value for its members for big-win supplies such as oil, tyres and paint by using its critical mass – together its scale is on par with top 10 AM100 dealer groups, with a nominal £2.5 billion turnover.
Members have saved £5.5 million a year.
All member dealers retain their independence. The RAA, funded through dealers’ initial investment plus rebates and payments from suppliers, acts as a co-ordinator with suppliers, who negotiate and tender with its working groups to agree an offer for members.
This is then agreed by the elected RAA board. Members then contract the supplier based on the RAA offer.
Successful strategies for financing your business
Daniel Taylor, Grant Thornton Automotive Services partner
Dealers need to wean themselves off debt in the wake of the recession, but accessing alternative areas for finance is proving difficult.
Daniel Taylor, Grant Thornton Automotive Services partner, said a lot of automotive retailers are dependent on their overdrafts to fund their businesses and suggested possible alternatives.
He said: “It’s important for dealers to think of ways to get out of the debt market of financing.
“It’s not easy to access new funds and it has put dealers in a difficult position where overdrafts are the easiest option.
Dealers need to wean themselves off debt and there hasn’t really been a change in the way they get finance.”
Taylor said a lot of growth leading up the recession had been funded by debt which left many companies vulnerable when things turned sour.
As a result, the last 12 months have brought to light how important cash flow and balance sheets are to surviving in the UK.
Dealers were advised to find out about how they could finance their business through private equity, factoring, the stock exchange and corporate bond markets.
Taylor said: “This year hasn’t been as bad as we thought it would be. Manufacturers took action very quickly to cut costs.
“Used car profitability came back at the start of 2009 and manufacturers have taken a much more pragmatic view of volume targets.”
“Her Majesty’s Revenue and Customs (HMRC) has been very supportive allowing businesses to defer VAT payments but this will end in 2010.”
HMRC will be a lot less forgiving next year and banks will also be looking to restore their capital base and profitability, which means dealers may see attitudes harden and become less flexible as a result.
Taylor said: “Dealers need to look within, process and control and managing external stakeholders and their relationships. Properly match the source and use of funds. Make it clear to banks what you’re doing because developing strong relationships with your funders is essential.”
Managing financial compliance in a changing legal environment
Stephanie Murdoch, Alliance Consulting
Dealers have to keep on top of regulatory changes concerning their provision of finance and insurance. The economic downturn is increasing the regulatory impact on banking, consumer finance and insurance, and further controls are coming, warned Stephanie Murdoch, managing director of Alliance Consulting.
Keeping evidence and documentation is vital, as dealers must prove they are operating within regulations and sticking to the principle of treating customers fairly. The Financial Services Authority (FSA) will visit every regulated firm by the end of 2011 and will expect to see evidence.
The FSA will also undertake a mandatory review early in 2010 of all payment protection insurance (PPI) complaints, including previously rejected ones. Murdoch raised awareness that PPI sellers are being targeted by lawyers seeking compensation and refunds for consumers as they are aware that many sellers have not kept sufficient documentary evidence to prove the policy was not mis-sold.
If a case is referred to the insurance ombudsman it will cost the seller £500, so dealers must ensure their sales process and documentation is robust.
Outside PPI, the FSA has cut its rules for regulated businesses. Instead, it has put more emphasis on prescribed desired outcomes from scenarios, and it expects senior managers within a regulated business to write their own rulebook to achieve these outcomes. The aim, explained Murdoch, is to be more flexible for business, but provide protection and transparency for the consumer.
Looking ahead, the Consumer Credit Directive comes in June 2010. It will allow consumers a notice period during which they can cancel their finance deal. A single regulator, the Consumer Protection Agency, is being considered, and the European Union is also driving much of the regulatory agenda.
Leading business performance from good to great
Karl Davis, Coachworks Consulting
Driving success in the dealership is about leadership, not just management, said Karl Davis, principal consultant of Coachworks Consulting.
Recruiting right-minded people, empowering staff and coaching them will benefit the business, he said, as will keeping them aware of the hard commercial facts about its performance and about the opportunities available.
This will also enable the leader to do more of what drives the company forward and less of the tasks that don’t contribute to the overall purpose. Ultimately, in retail there are only three ways to do better: sell more, at more margin and at lower cost.
Davis said directors should walk through the whole business and engage with every part of it to fully understand what is going on.