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It’s time to take control of your working capital

Motor retail businesses are among the most demanding of any industry when it comes to working capital utilisation, forecasting and management.
A combination of substantial investment in retail facilities, high-value stocks and assets that cannot be funded such as parts and debtors can place substantial pressure on a business, particularly if it has been weakened by losses in recent years.
Losses alone won’t sink a business, but a lack of cash certainly will. The banks supporting the sector remain nervous and any breach of a facility or covenant that is not forecast and agreed in advance is likely to result in the bank taking a very negative view of the risk profile and management team in place. Indeed the seasonal overdraft excesses which have historically formed part of most dealers’ banking facilities now require detailed cashflow forecasts prior to approval.
Despite all these pressures it is still common for motor retailers to lack focus on the control of working capital. The gap in performance between the top 25% and the bottom 25% is significant and we would estimate there to be at least an additional £100,000 tied up in working capital for a typical bottom 25% dealership.
The reason for such a broad spread in performance is that while it is relatively easy to obtain short-term savings through individual initiatives such as slowing down payments or managing stock levels, long-term gains demand a sustained effort and systematic approach.
Excellence in working capital management requires more than just a tactical approach. It is a complex undertaking that requires the ongoing co-operation of every part of the dealership – including sales, aftersales, accounts and most importantly the management team. Decision-makers throughout the organisation must engender a “cash culture” such that each individual department’s mission is not simply achieving sales targets or CSI levels, but to act wisely as a steward of company cash.
All businesses with a strong cash culture tend to have certain key attributes. These are:
Working capital is a daily item on the agenda of the management team
Employees are compensated based on their efficiency of working capital use

There are clear metrics over working capital control in place

Cash policies are carefully considered, understood by all and operate effectively on a daily basis with no exceptions.

Stock is viewed as an investment in a depreciating asset

So how does the above culture exhibit itself in practice?

Here are just a few examples of attributes a motor retailer with a cash culture exhibits.

Dealers maintaining strong daily operating controls in the sales department enabling the forward order book and its consequences for the cash position to be understood in detail both by the department and by the general management and accounts function.

A short-term detailed cash flow forecast to highlight ineffective working capital practices and decisions.

A weekly debtor/WIP meeting involving department managers to drive action points for invoicing and debt collection.

Ensuring that department managers are charged interest on the working capital levels that their departments are utilising.

Ensuring strong controls are maintained over stocking profile/limits, overage stock, registration and vehicle release activity together with penalties/ compensation for the managers concerned in meeting targets.

Detailed daily monitoring reports that highlight inefficiencies or breakdown in controls such as:

  • Unfunded stock reports
  • Cash account debtors
  • WIP > 7 days old
  • Used stock > 60 days old
  • New fully paid stock

In the end, a lot of working capital improvements come down to simple common sense.

Having said that, day-to-day discipline is impossible to achieve without a cash culture being in place. Implementing some of the above practices will help, but ultimately it is a process that demands ongoing focus and drive from the leadership team.

Working capital management case study

We were recently appointed to assist a multi-franchise, £50 million turnover group.

A period of sustained losses and tightening credit availability had meant that funding was barely sufficient to meet the working capital needs of the business.

Working closely with the management team we implemented strict cash management processes and controls while engendering a “cash culture” prevalent throughout the whole operation.

Examples of specific actions implemented were:

Cash management

  • Allocation of responsibility for managing daily cash transactions to a single person
  • Maintaining a real-time detailed cash flow, accurately predicting cash requirements over a six-week rolling period, in line with planned working capital investment
  • Release of payments and significant working capital investment controlled at director level

 

Cash culture

  • Schedule of cash position, cash forecast, stock investment, significant debtors and vehicle funding reviewed at the start of each day at director level
  • Vehicle deliveries authorised at senior management level, after verifying cash receivable and ensuring vehicle adoption has been included in the cash flow forecast
  • Cash and working capital management focus reinforced in weekly senior management meetings, including review of finance balances generated vs target, debtors, stock ageing and retail and trade stock levels
  • Monthly meetings with bank and major funders to discuss cash
  • forecasts and business performance

The actions taken had a significant impact on the cash balance, freeing up an estimated £500,000 during the peak registration periods and £200,000 outside of the peak.

 

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