Cash Management Tips

In these trying economic times, the old cliché “cash is king” has never more true. As boat dealerships weather the current economic storm, the ability to manage, conserve and forecast their cash may make the difference between survival and extinction. This article focuses on three time horizons related to cash management: (1) what should dealers be doing on a daily basis; (2) what they should be doing on a monthly basis; and (3) what they should be doing to forecast their future cash needs.

Let’s start with a quick definition. There are two types of cash and it is important to understand the distinction between them. “Bank cash” is the balance you have in your bank account at any given time. This balance will reflect the actual deposits and withdrawals that have been made in your bank account.

“Book cash,” on the other hand, reflects that which you will find in your accounting general ledger (G/L) and reflects transactions in process (i.e., items that have been recorded in the G/L but may have not cleared the actual bank account yet.) For example, a check that was issued today and mailed to a vendor will be reflected in your book cash but not in your bank cash.

One of the first things a dealership should do every day is to check the bank cash balance in its operating account. On a macro basis, this balance and any material change in the balance should be understood and make sense. For example, if you recently paid off a boat that was floorplanned, you should see a corresponding drop in the balance. If the funds from the customer were received and deposited the same day as the boat was paid off, the balance would reflect that accordingly.

Once you get used to looking at your bank cash each morning, you will see that it is amazingly predictable (logical). This should be no more than a 5- to 10-minute exercise. No need to try and factor in every check you have written recently or every deposit made. Look for the large changes that you know have recently transpired and make sure you are comfortable that they make sense and/or are logical.

When you see a change that doesn’t make sense, you need to find out what happened and why? For example, perhaps a floorplan payoff was not made or was otherwise delayed. Perhaps a large customer deposit for a new boat sale was deposited into your escrow account by mistake. Honest people make honest mistakes. That happens. The key to looking at your bank cash every day and understanding the balance is that it is a great tool to find and correct any mistakes in a timely fashion.

Once you get comfortable with this daily process, you’ll be surprised at how easy it is to analyze the balances quickly and how predictable the cash cycles are at your dealership.

Here are two banking products that dealers should be using on a daily basis:

(1) Positive Pay — As the global economy continues to move to a cashless and checkless system, many boat dealerships still rely heavily on company checks to pay their employees and vendors. If your dealership has a significant service component, the number of vendors and subcontractors who get paid via check is significant.

When you couple the trying economic times with the ease with which paper documents can be fraudulently altered, the probability that you will be the victim of check fraud is very high. If you are doing nothing to protect yourself because you think check fraud, should it occur, is the bank’s problem, you’re wrong. Courts have held that if a customer is not taking reasonably prudent steps to protect themselves (e.g., doing timely bank reconciliations), they can be held liable for the losses.

The good news is that there is a simple but effective product out there to prevent this kind of check fraud: “Positive Pay.” Most banks offer this service. The way it works is that you send the bank an electronic list of all the checks you have issued on a particular day (check number, amount). When your vendor submits the check you have given them for payment, your bank matches the physical check information with the electronic information you sent them. If it matches, it is cashed. If it doesn’t, it isn’t. (There are some methods for companies to approve online before the check is rejected.)

If you currently issue paper checks and you do not use Positive Pay, you are playing Russian roulette. It’s not a question of if you will be defrauded but a matter of when.

(2) Floorplan Offset Account — A key component of cash management is making sure your cash (an asset) is gainfully employed to provide a return (income) to your business. Your cash levels will fluctuate with your normal business cycles. Many dealers struggle with what they should do with their excess cash balances. They don’t want to put the funds in a risky investment or tie them up for fixed periods of time. They’re never sure exactly when they will need the funds.

Therefore, many dealers just leave the cash in their operating accounts; usually earning a paltry interest credit rate (against monthly bank service charges). Some dealers will sweep their excess cash into overnight treasuries. In a treasury sweep, the excess funds leave the operating account at the end of the day and get invested overnight in a treasury fund, and are then re-deposited into the operating account the next morning. This satisfies the low-risk criteria, but the interest rate on treasury funds has been slightly higher than the bank’s interest credit rate (very low).

A better solution is to set up a Floorplan Offset Account with one or more of your floorplan lenders. This works like the treasury sweep except the excess funds are used to pay down your floorplan line. These can be set up as manual transfers (initiated by the dealer) or to automatically sweep out when you have excess cash and then back in when you need them.

In the meantime, the account is earning interest for you at your floorplan interest rate (much higher than the treasury rates in the current floorplan lending environment). While this is higher risk than treasuries, it is only slightly higher (if you’re dealing with a solvent lender). This meets both the lower risk and higher return criteria and puts your asset (cash) to work for you. (Note that it also reduces risk for your floorplan lender as you have more equity in the stock boat inventory).

During my first exposure to cash management for a boat dealership, I recall it being a little like the old “shell game.” By that I mean you cannot look at just one thing (e.g.: your cash account) and understand your actual cash position. You have to look under all the shells.

For example, you may have a lot of cash in your bank account, but that may be the result of high customer deposit activity (other people’s money). Or you may have very little cash in your bank account, but your Floorplan Offset Account is maxed out (earning a competitive rate of interest and very liquid). Or perhaps you have very little cash, but you own all of your trade-ins outright (a source of cash if you decide to floorplan them later).

The key to getting a handle on this multi-dimensional cash management is to pull all the components together for a comprehensive analysis on a monthly basis. (Monthly, because what you’re really interested in here are the longer-range trends.) This cash management tool is perhaps better described as a liquidity analysis and has two major components; (1) Your cash and (2) Equity in inventory.

(1) Your cash — To determine your true-cash position; get the following amounts from your G/L (book). Start with your book cash, add the amount you have in your Floorplan Offset Account (this is recorded as an offset to the floorplan liability in your G/L), subtract the amount of customer deposits (other people’s money), and add the amount you have advanced to manufacturers for ordered boats. The net of this represents your cash.

(2) Equity in inventory — Cash is just one component of liquidity. Depending on your floorplan strategy, you can have a lot or very little of your cash tied up in your boat inventory. If you have a lot, and your floorplan lender is viable, you can pull some of your cash back out of your inventory if you need it.

In your G/L again, start with the amount of your new boat inventory, add the amount of used boat inventory (don’t include parts, these are not liquid) and subtract the gross amount of your floorplan liability outstanding (or other short-term borrowing). Don’t forget to add the Floorplan Offset Account balance back against both new and used boat inventory.

The net of this represents how much equity you have in your boat inventory. Factor this amount by the advance rate you conservatively think you can get from your floorplan lender should you decide to floorplan some of the unencumbered boats. In better times, it was probably 85 percent. Today is probably closer to 50 percent.

The sum of the two amounts above represents the liquidity in your dealership (your cash plus your ability to generate cash from inventory). The reason this is included under a monthly analysis discussion is that its real value is to trend it over time (e.g., the last 24 months). Graph the results and you will see major trends emerge. These trends will provide your management team with great information to take corrective action in the business.

Forecasting future cash needs
Have you ever driven your car to work looking only out the back window? How about just looking out the side windows? Of course not, but that the equivalent of historical financial statements, even if published on a very timely basis. It’s not very effective is it?

Financial statements and cash management tools play a critical part in effective management of your dealership, and their importance should not be minimized. The truth is, however, that they really serve as the solid foundation that the house should be built on (you can’t build the house without them).

The most important cash management tool a dealership needs is an effective method to accurately look into the future to forecast future performance, resulting cash needs and loan covenant compliance.

This can be very complex and time consuming if done correctly and manually. Fortunately, through the use of computers and software that will crunch thousands of formulas instantly, this is not as difficult as it once was.

An effective method to accomplish this is to build an Excel spreadsheet model of your dealership’s monthly financial history and then use it to forecast future results. Load the history of all your income statement and balance sheet G/L accounts by month. Add all of the standard financial ratios that are used to analyze a business. For example, inventory turnover measures the performance of your boat inventory levels (balance sheet) compared to your sales (income statement).

Spend some time analyzing the past performance and the ratios. Look for trends, correlations and any other insights that will be useful to predict future performance (e.g., when sales are X, my accounts receivable historically are Y).

To the right of the historical data, build a forecast model by month for the next rolling 24 months using all of the relationships you uncovered above. The income statement projections and the balance sheet projections should be fully integrated (that’s very important). Let the forecasted book cash level for each month be the dependent variable. In other words, once all the assumptions, projections and accounts are forecasted, the cash levels that balance the balance sheet are determined.

At the bottom of the spreadsheet, load in all of your detailed loan covenants (the detailed calculations the lenders will make from your financial statements). Put in a test for each covenant, for each month, which shows what the covenant performance will be under the above forecast assumptions and whether or not you will miss a covenant (and when).

The beauty of using Excel for this is that it has a solver add-in feature that will balance each month (by determining the level of cash needed to make the balance sheet balance) and then roll to the next month to do the same, until all 24 months are completed. This takes seconds to complete. A manual compilation would take hours.

You can then adjust your assumptions as you see fit (it is your forecast) and run it again. (For example, what your future cash levels would be if sales increased or decreased 10 percent.) This a great tool for conducting sensitivity analyses.

The power of this financial model is that it lets you look into the future to forecast what your cash needs will be given certain performance assumptions and the impact on your loan covenants. This will give you plenty of lead time to take corrective action (e.g., implement cost reductions) and/or negotiate with you lender on the future covenant performance. In these trying economic times, you do not want to simply miss a loan covenant and wait for the bank to call you.

Cash management for boat dealers in the current economic environment is more challenging than ever and more important than ever. Using the tools mentioned above will give you a competitive advantage and put you in a position to rebound quickly when the economy improves.

Note about the author: Mike Eiffert is the former chief financial officer of Galati Yacht Sales. Boating Industry magazine selected Galati as the No. 1 boat dealer in the country in 2008 and 2007 as part of its Top 100 program. He is currently providing financial and management services on a consulting basis (; 941-795-7558).

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