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Short-term planning

As I prepare this article, the markets are crashing every other day, interest rates are falling, unemployment is going up, the European markets are exploding and a Double Dip Recession on the way (they say).

Then I listen to an economist review the DC ideas for creating jobs and it was thumbs down on all but one idea, and he even thought that was short lived. Extending unemployment benefits, extending the employee tax payroll tax cuts were both thumbs down. Tax credits for hiring would most likely have a short-term impact on job creation. The only other idea was to fund infrastructure projects, but how you pay for them becomes the problem.

You must find yourselves in the same confusing situation with the same questions I have, specifically, “How do I plan for the balance of 2011 and what should we budget for 2012?” I don’t know about you, but I have my crystal ball, Ouija Board and darts to help me through the process. If I had to guess, I suspect the final results for 2012 will mirror 2011.

On the other hand, 2012 could be a lot better than 2011. And there you sit with your original conservative plan you can wrap fish in because that’s all it’s good for. Another commentator stated there is no longer a long-term investment strategy you can follow and think you are making safe investment calls. He suggests frequent short-term programs are becoming more the norm. In short, you cannot plan a year out; maybe a quarter, but not a year. I think for the near future, short-term planning is the way to go with your income statement and cash flow projections.

We have discussed dealer financial planning in the past, specifically about projections and cash flow analysis. To take into account this short-term planning process I suggest you do the following:

Update your 2011 budget for the balance of the year. Create a monthly budget and cash flow for the balance of the year and track your results as you go along.

Do the same for 2012. Build it monthly so you can project monthly and quarterly results. Don’t just pick an annual number and divide by 12, it does not work that way any longer. Budget, Cash Flow, EBITDA figures by month and quarterly with seasonable fluctuations built in is the way to go.

Pay particular attention to both Gross Margin and Personnel Cost. As our friend Al Bates keeps reminding us, these two figures control the results you will get.

My experience tells me you will budget your line items below the gross profit line pretty well as long as you have a history of the account activity. I review the history, check for seasonality of the activity, review the expected cost for the balance of the year and estimate the cost for the next year. I divide these expense categories pretty much along the DISC Report format: Personnel Costs, Occupancy Costs and Operating Costs. Personnel cost includes payroll for personnel not included in Cost of Sales. I don’t know how we do it, but we are seldom off by more then $10,000 in any of these major categories.

Your problem will be the sales and cost of sales categories. I prepare a worksheet to record estimated sales by category as well as the cost of sales for each category. This worksheet takes a lot more effort to complete with little room for error. A small problem here and there can lead to big swings in both gross profit and cash flows. Equipment sales will be the wildcard. Parts sales should follow some seasonal pattern, as should service. Department Heads should be able to provide both revenues and expenses for their department. If they cannot you have to find out why; is the data they need not available or do they not understand how to provide the data. In either case you have a problem that needs fixing.

You will get away without too many changes to the Personnel, Occupancy and Operating Expenses budget items unless you go in and make specific changes to these expenses. For the sales categories, you need to update them at lease monthly. You will get a feel for this process after a few months, to the point where you will spend your time reviewing the differences and why they occurred.

The other issue to consider when getting control of your operating data is the time it takes to close your books. I know it is tough to believe, but there are dealers closing their books in two days. I expect a more reasonable time would be 10-15 days. If it is taking longer then 15 days to close your books, changes are needed to speed up the process. What really needs to take place is to have the department heads get their transactions booked on a daily basis. Scheduling management meetings once a week to review open items seem to clear up this problem.

To reduce risk, dealers need to take control of their environment and match the activity to current market conditions. Using a flexible budget along with closing the books in a 10-day period provides management with time to make adjustments to maximize profits.

Garry Bartecki is a CPA MBA with GB Financial Services LLC. You may contact him by e-mailing