Most automakers require their dealerships to maintain a certain level of working capital (working capital requirement). The calculation varies among manufacturers. The required working capital amount should be shown on the first page of the dealers’ monthly financial statements. Typically, the requirement is not unreasonable and represents an amount that dealers should strive to maintain in order to preserve an adequate level of cash flow and to run a healthy dealership.
Sometimes, however, these amounts are not calculated properly and can place an undue burden on the dealership. Carl Woodward, an Illinois-based automotive consultant, researched about 50 dealerships and found that the working capital requirement usually averages about 4% of total annual revenue. Dealers should review their working capital requirements. If you don’t know what it is, check with your manufacturer. If the requirement is greater than 5% or less than 3% of annual revenues, there could be a mistake in the calculation.
Dealers should also take a look at what accounts are being factored into their working capital. Be sure that liabilities such as loans from owners or other related entities are not classified as current if they are not intended to be repaid within 12 months. This will surely understate your working capital. Likewise, a long-term asset erroneously classified as current will overstate working capital and give a dealer a false sense of security.
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