Like many businesses, the automotive wholesaler has sales to make and expenses to cover. Unfortunately, the latter must be committed to first, in the hope that the second will follow.
Consider the following:
An independent jobber or WD-owned store group is relatively satisfied with its profitability. Despite a highly competitive market with many players including retailers delivering to service dealers, sales have been strong and profit margins are higher than a year ago. But, this store group is having problems meeting payroll and paying its suppliers in a prompt manner. So what is going on?
This management team has forgotten that in addition to strong sales, it is imperative that the store’s accounts receivable must be carefully managed. In other words, revenue must be collected promptly. Poor management of accounts receivable is one of many reasons that stores have been forced to close their doors during the recent past.
How are you managing your receivables? How fast do you collect your money? First you should measure and compare yourself with others in the aftermarket. One measure that is commonly used in the industry is days of sales outstanding. It is based on your month end accounts receivable balance and your daily rate of charge sales. Recent (1999) industry survey data show what the days of sales outstanding benchmarks are:
AAIA Financial Benchmarks for Success Survey:
average days of sales outstanding = 44.9 days for independent jobbers
AWDA Financial Analysis Survey:
average days of sales outstanding = 39.0 days for WD-owned stores
upper quartile = 31.7 days
So, how do you compare? And remember the lower your days of sales outstanding are, the faster you are collecting your money and the better your cash flow will be!
What can be done to speed up the collection of your sales revenue? There are two parts to better receivables management. First is credit management–the up-front work of carefully evaluating new or potential accounts. And second is collecting your revenue.
Good credit management begins with knowing your customer prior to the sales. You should be able to answer satisfactorily:
Who is the potential customer’s current supplier?
Why does he want to switch and buy from you?
Will this potential customer be happy with your mix of quality, service, and price?
What does this potential customer expect from you?
Another important thing to consider is to insure that all approved credit applications receive a welcome letter. This letter should contain:
Who to contact in your office should payment become a problem
Their new customer account number
Terms of payment
Your policy should an account become past due
Information on applicable programs that you have (equipment leasing program, a tool purchase program for example)
Also, insure that your credit application asks the questions you need to know so that you can do a good job evaluating this potential account. For example, do you ask for a description of their business, their sales tax number, and business and personal references?
Now, what about the other part of stronger accounts receivable management – that of collections?
One tool that we strongly recommend is maintaining a by-customer aged receivable report.
Note that besides the customer name and number, this report tells you:
when they last paid you
their telephone number, credit limit, the amount of credit available
their total balance
the amount owed this period, and how much they owe (up to 30 days, 31 to 60 days, 61 to 90 days, and over 90 days).
Using this report, you should be able to see when you were paid last and by whom. By looking at the attached report, you can possibly avoid getting into a potential bad debt situation (such as with Account # 170 – “H & H Super Service”). Or, using a customer aged receivable report can show you that it might just pay off to raise the credit limits of a good account such as Account # 110 – “Braswell Transmission.”
One of the key things to always remember about managing recievables is that an account can be rehabilitated if it isn’t allowed to go too far and get in too deep. Another point worth considering is that an account which owes you money has probably stopped buying from you.
Effectively managing your receivables not only keeps profits, it can also keep customers.
WANT TO LEARN MORE?
Are you interested in learning more about what you can do to collect your sales revenue faster as well as improve the overall profitability of your store? The University of the Aftermarket’s Store Profit Management self-study video series can help you do this. The tips mentioned here are just an example of what to look for to improve your accounts receivable management, improve your inventory and boost your bottom line. Other topics presented in this eight video series are:
Improving gross margin;
Increasing sales productivity;
Reducing operating expenses;
Setting goals for improved profitability.
What are the next steps you need to take to explore the topics contained in this seminar? You can order your video series on the University of the Aftermarket’s web page (under Self-Study Programs) (www.univaftmkt.org) or you may FAX your order to the University (816-523-8252) or call the University registrar at 1-800-621-UNIV. The cost for this eight tape series is only $189. It is an outstanding investment towards improved profitability. (The University accepts MasterCard, VISA, Discover, and American Express).