Managing in a downturn

This article was written by Tim Humphries. Tim is an independent consultant to the motor trade and former Finance Director of Motorline and Beadles. For more information on the contents of this article, contact Tim via LinkedIn at www.linkedin.com/in/tim-humphries or call 07740717201.

After a couple of profitable years, 2023 proved to be a challenging year. Increased interest rates and rising costs due to high inflation combined with lower demand, better supply and falling used vehicle values have all played a part. Combine this with a generally flat economic outlook for 2024, and I thought it would be useful to look at two additional risks faced by finance directors during these difficult times.

Cash and working capital management

During a downturn, controlling costs and effective cash management are critical. Good cash management does not mean you should not spend or invest, provided you plan, prioritise and are financially disciplined. As a minimum, you should have a high level (monthly) cash flow forecast.  This will show key cash movements and future spending as well as expected trading cash flows, helping you to understand your cash highs and lows and identify any points where you may be at risk of breaching overdraft limits or loan covenants. If this forecast highlights some areas of concern, there may be things you can do to reduce the impact of some of your cash outflows such as reducing spend, obtaining a seasonal increase in your overdraft, changing your stock funding or loan repayments, or reducing your stock. Detailed cash flow forecasts (daily/weekly) are much harder to prepare in our industry but not impossible and will help you manage your cash much more effectively. Whatever cash flow model you use, once prepared it is important to keep it updated and revise any forecasts based on actual sales and costs to ensure you stay on top of your cash position.

There are ways you can ensure you maximise your cash position. These are all good practice regardless of how much cash you have.

• Get your management involved: do your managers understand the impact and importance of cash flow management? All too often I see a disconnect between managers targeted and focussed primarily on sales or with a lack of understanding of the cost of holding stock or managing debts. Ask your managers to include the impact on cash flow when making decisions and encourage them to think more about managing cash flows on a regular basis. This will empower them to search for their own ways to maximise cash or save on less-essential business costs.
• Vehicle stock management: with recent falls in used values I am sure that vehicle values have been reviewed and assume you regularly review your stock holdings against CAP, Glasses or some other benchmark. Stock checks should be carried out regularly (I would advise monthly) and be undertaken by someone outside of the sales department if possible.  With the automation of stock funding, it is easy for used vehicles to drop out of funding and become fully paid and therefore use up your cash reserves. To avoid this, ensure the discrepancy reports from your funder are investigated, and it is good practice to reconcile your stock lists to your funded lists on a regular basis. Finally, be firm when carrying out over age reviews and dealing with problem vehicles. If your used funding rate is 8% (2.75% above base rate), then a £20,000 used car at 90 days old has already cost you £400 in interest!
• Debt reviews and invoicing: debt collection starts with the invoice. Don’t give the customer any excuses for delaying payment by making errors on the invoice or not including a purchase order number if requested. As well as accuracy, timing is important. All too often invoicing is left to the end of the month which delays payment further. Issue the invoice as soon as the work is completed to keep payment times to a minimum and chase payment as soon as it becomes due. If you have not carried out a review of your credit limits, now is a good time to look and see if the customer’s risk profile has changed and amend limits accordingly. Ensure you have a policy for approving new credit accounts which includes a third-party credit check and ask why the customer wants credit from you now (e.g. have they hit their limit with their usual supplier but can’t afford to pay them?)

Increased risk of fraud

Economic downturns often lead to a spike in fraudulent activity. I covered cyber security and some of the common online frauds in my article in the summer 2023 edition of Motor Matters. Whilst the internet has enabled many new scams, con artists and fraudsters have been plying their trade since long before computers were invented. Here are some of the more common offline frauds:

• Payment with a stolen card: this continues to be an issue with card thieves purchasing high value or easy to sell items with a stolen card. It often takes weeks for the payment to be flagged as fraudulent by which time it’s too late to recover the goods. The best way to avoid this is to only take payment via chip and PIN as this guarantee’s payment. Fraudsters typically get round this by paying over the phone and then collecting from the dealership. Be very cautious when customers you don’t know order expensive items over the phone and plan to collect.
• Payroll fraud: it has always been good practice to separate the recruitment and payroll processes where this is possible. Independent and senior review of payroll prior to processing will also help identify any issues.
• Contract signing: who has the authority to sign off contracts and where is this policy documented? How do you ensure none of your staff enter in to contracts without the right authority?
• Bribery: you should have a policy on bribery and what your staff can accept as gifts/incentives from third parties. Are you satisfied that this policy is followed and understood?

Economic downturns happen periodically, interrupting the growth that prevails most of the time. It’s easy to think of doom and gloom, but with effective long-term planning, good business management and the understanding that no economic downturn lasts forever, you can steer your way through this current downturn.