Where Is All My Cash?

You submit your dealer financial statements to the manufacturer and feel pretty good about the net income you generated during the reporting period.  Then you notice your cash balance is considerably low.  How could this be, given the net income you generated?

One of the most useful management tools to assess the overall financial position of the dealership is a cash flow statement.  The cash flow statement will outline what happened to your cash during the reporting period between operating, investing and financing activities.  The statement does so by starting with your net income (or loss) and adjusting it to the cash basis of accounting by evaluating the changes in assets and liabilities such as accounts receivable, inventory and floorplan from the beginning of the reporting period to the end of the reporting period. 

So, which balance sheet line items go in operating, investing and financing activities?  As a general rule of thumb, investing activities include purchases and sales of fixed assets and investments.  Financing activities include payments and borrowings on debt obligations and activity within net worth, including capital contributions and distributions.  Operating activities include other “operating” type line items, including accounts receivable, inventory, accounts payable and floorplan.  Also within the operating activity, net income is adjusted for income statement activity that is not a cash activity, such as depreciation and changes in the LIFO reserve. 

Once you have assembled the statement, you should analyze it and ask yourself questions, such as:  Where did we use our cash?  Are operating activities showing a positive cash flow?  Do the fluctuations in inventory and floorplan have a direct correlation?  Are capital projects burning a lot of cash?  Are distributions causing cash levels to be low?  Did we pay off some debt?  By answering questions such as these and reviewing the cash flow statement, you should have a better picture to what happened to the dealership’s cash during the period.

For more information, please contact Jason Pierce.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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