In the run-up to and the aftermath of the GM and Chrysler bankruptcies, many dealers learned the critical importance of net working capital. This is not to suggest that dealers were previously inattentive. All business people know that one must be sufficiently capitalized to operate efficiently. However, many franchised GM and Chrysler dealers did not fully understand that an important factor for their continuation as dealers was their compliance with the franchisors’ net working capital standard.
For franchised dealers, it is critical to meet or exceed the minimum working capital standard developed by the dealership’s franchisor on a continuing basis. But having too much capital leads to unnecessary exposure of assets in the event of a crisis precipitated by franchisor problems like bankruptcy.
So what is the answer for a dealer who must worry about these competing priorities?
- Watch working capital monthly. Losses can lead to reductions in working capital, just as profits can lead to increases. Know your franchisor’s working capital standard and be sure that you are meeting it each month when you print your dealership’s financial statement.
- Protect against inordinately high working capital. If the dealership is forced to seek the protection of bankruptcy because of the bankruptcy or other crisis of your franchisor, you do not want to unnecessarily expose assets. Distribute excess capital.
- Do you have valuable assets on the books for your company? Examples are boats, personal motor vehicles, artwork, and the like. Ask yourself why they are on the books of the company and are not your personal assets.
- Be especially concerned about year-end entries. What effect do they have on working capital? Will your year-end statements show that you meet or exceed your manufacturer’s working capital standards?
If you fall below the working capital standard, consult with your accounting and legal advisors for the most effective way to cure the situation. Must you contribute capital? If so, should it be done as equity or should it be done as a long term loan which will qualify for appropriate treatment under your franchisor’s net working capital formula? Are there some other steps that can be taken to free up working capital under your franchisor’s formula?
Learn the lessons from the manufacturer bankruptcies. Pay attention to the dealership’s net working capital every time you produce a statement that goes to your franchisor and be sure that you continually meet or exceed your net working capital standard.
In the run-up to and the aftermath of the GM and Chrysler bankruptcies, many dealers learned the critical importance of net working capital. This is not to suggest that dealers were previously inattentive. All business people know that one must be sufficiently capitalized to operate efficiently. However, many franchised GM and Chrysler dealers did not fully understand that an important factor for their continuation as dealers was their compliance with the franchisors’ net working capital standard.
For franchised dealers, it is critical to meet or exceed the minimum working capital standard developed by the dealership’s franchisor on a continuing basis. But having too much capital leads to unnecessary exposure of assets in the event of a crisis precipitated by franchisor problems like bankruptcy.
So what is the answer for a dealer who must worry about these competing priorities?
- Watch working capital monthly. Losses can lead to reductions in working capital, just as profits can lead to increases. Know your franchisor’s working capital standard and be sure that you are meeting it each month when you print your dealership’s financial statement.
- Protect against inordinately high working capital. If the dealership is forced to seek the protection of bankruptcy because of the bankruptcy or other crisis of your franchisor, you do not want to unnecessarily expose assets. Distribute excess capital.
- Do you have valuable assets on the books for your company? Examples are boats, personal motor vehicles, artwork, and the like. Ask yourself why they are on the books of the company and are not your personal assets.
- Be especially concerned about year-end entries. What effect do they have on working capital? Will your year-end statements show that you meet or exceed your manufacturer’s working capital standards?
If you fall below the working capital standard, consult with your accounting and legal advisors for the most effective way to cure the situation. Must you contribute capital? If so, should it be done as equity or should it be done as a long term loan which will qualify for appropriate treatment under your franchisor’s net working capital formula? Are there some other steps that can be taken to free up working capital under your franchisor’s formula?
Learn the lessons from the manufacturer bankruptcies. Pay attention to the dealership’s net working capital every time you produce a statement that goes to your franchisor and be sure that you continually meet or exceed your net working capital standard.