Peeling Back the Layers of Your Financial Statement
Isn’t it about time you peel back the layers of your financial statement? Your factory financial statement might look perfectly fine, but if you don’t peel back the layers of your financial statement, you may miss some signs of rot that you will want to kick yourself for later.
When a dealer calls because they have a nagging feeling that something is not quite right in their store, I begin by peeling back the layers of their financial statement. Most dealers review their financial statements each month. However, many don’t ask to see the next layer – a full trial balance – at the end of each month.
The reality of the dealership financial statement is that it’s not a full picture. It’s like the outer skin of the onion – thin, easily removed and often is not a good indicator of a fresh or rotting onion. The financial statement doesn’t show you the details, so to trust it without looking beyond the outer layer is just foolish.
Let’s focus on your balance sheet because at the end of the day if your balance sheet is accurate so is your bottom line, even if the accounting on the profit and loss happens to be sloppy.
A great example in most dealerships is found in the liability/payable accounts. Those accounts represent sales tax for both vehicle sales and service, payroll withholding accounts, unemployment taxes payable, GAP payable, ESC payable and much more. It’s not uncommon to find 10 – 30 different payable accounts on the dealership trial balance. The issue is the financial statement you look at each month compresses all those accounts into just five to eight lines on the statement. The balance looks reasonable, so it must be right, right?
Maybe, maybe not. You need to peel back the layer to check. You do this by looking at your trial balance regularly. Here’s an example of what can happen if you don’t.
The financial statement for payroll taxes payable line item shows you owe $40,000 (a credit balance as it relates to your ledger).
Your Trial Balance shows:
Federal withholding – credit balance $17,000
Social Security/Medicare payable – credit balance $10,000
Federal Unemployment tax – debit balance $10,000
State withholding – credit balance – $3,000
State Unemployment tax – credit balance $8,000
Total payroll taxes routed to the financial statement equals $40,000.
If all those accounts are routed to your financial statement to the payroll taxes payable line, you won’t see that there is a significant problem in your federal unemployment tax account because all you see is the $40,000 balance, not the $10,000 debit that would flag a problem that needs review.
I’ve found many accounting issues buried on a financial statement just by looking at the trial balance and looking at the balances of the individual accounts.
The next layer to peel back to is your schedules or controlled accounts. (Terminology depends on your DMS system, and since I spend much of my time in DealerTrack DMS, I will default to terms used in their system most often.) Most dealers have a few controlled accounts they want to see each month, but they don’t realize how many more are available to review.
A large chunk of your balance sheet should be scheduled or controlled which means everything in and out of these accounts should clear out by control number or stock number. When this is set up correctly and used properly, your books stay very clean. This makes discrepancies, regardless if they are clerical errors or nefarious actions, easier to isolate and correct.
Why look at the schedule? Again, there can be significant issues buried on them.
Let’s look at an example of a scheduled account – Vehicle receivables.
Your trial balance shows you are owed $10,000 (a debit). This might seem reasonable as it could be a down payment that didn’t get recorded until the first of the month.
However, if you pull the schedule, you see a different picture.
Date Control Balance
8/1/18 M4980 ($1,000)
9/2/18 M9432 ($1,000)
9/5/18 F9800 ($1,000)
10/3/18 F9876 $5,000
10/3/18 M9564 $650
10/14/18 M9743 $2,000
10/18/18 M9801 $1,000
10/31/18 F9903 $350
10/31/18 M9988 $4,000
Seeing the details behind the schedule begs several questions. If you are reviewing the month of October, why would you have three credits for $1,000 each from prior months? Are they deals unwound and money not refunded? Are they rebates received for rebates not booked? Additionally, how do you have a $5,000 down payment missing from 10/3? Has M9801 and F9800 down payments been crossed or do you really have that many missing down payments?
If you are a DealerTrack DMS dealership you don’t have to wait for month end schedules to review this type of information, if set up properly you can quickly and easily view your managed accounts and spot issues much quicker.
In summary, if your financial statements or accounting leaves you with a nagging feeling that something is not right, start peeling back the layers to make sure your store is not rotting from the inside out.