Case Study: The Challenges of Running a Retail Business: Accounting, Inventory, Financial Forecasting…

Case Study of a Retail Powersports Dealership: 

It is a disheartening fact, but Harvard Business School reports that 75% of new business startups fail within four years. Depending on the Industry, failure rates climb to over 95% (Finance, Insurance, Real Estate). 1

Categorization:
Industry: Retail, Category: Automobile Dealers, Sub-Category: Motorcycle & Powersports Dealerships

Company profile:

  • Beasley Motor Co., Inc. dba Beasley Honda Yamaha — Started as Quality Imports in 1963 – Under Current Ownership since 1981
  • Revenues in 2010: $4.5 million
  • Estimated Profits: Gross $1.4 M | Operating $0.9 M | Net (Pretax) $0.47 M
  • Authorized dealer for Honda, Kawasaki, Polaris, Victory, Ural, Royal Enfield and Kymco –
  • Additional revenue streams from Used Vehicles, parts & accessories, service labor, finance & insurance (F&I)
  • Stores in Savannah and Brunswick, Georgia
  • Business structure is S-Corporation
  • I retired December 31, 2011 and closed the business permanently

I was the owner of this company, Beasley Honda-Yamaha, which I bought as an existing business, averting many of the challenges of starting with a blank page. Nonetheless, I still had to traverse the obstacles of securing financing of the business purchase, funding of the inventory and obtaining approval as a dealer from the vehicle manufacturers. Failure to acquire any of these necessities would doom the endeavor before it ever started.

Immediately after the Buy/Sell was a “Done Deal”, I realized that my problems – barriers to profitability, threats to my livelihood – were only just beginning. Below are some of the challenges all small business owners/operators must overcome on a daily basis. I admittedly had an advantage in that I was General Manager of the dealership for eight years prior to owning it, thereby facing .challenges to management every day. Nevertheless, nobody knows all the difficulties first hand nor have they endured the depressive stress that only the owner can experience. There were many days I was a nervous wreck.

Here are Some of the Challenges Retail Businesses Must Overcome to Survive and How my CPA Overcame The Ones We Faced

  • Accounting Setup Choices for the CPA:
    • How to set up the tax category of the Company; C Corporation, S Corporation, Limited Liability Corp. (LLC) or Proprietorship.
    • How to handle bookkeeping, whether manual, in house software or cloud based applications.
    • How to employ the services of the Accountant, whether limited to filing tax reports and returns or full-service, including taxes, posting entries to the General Ledger and Reconciling Bank Accounts & Credit Cards.
    • Payroll: Let the Accountant do it all to assure compliance with state & federal tax agencies and to add transparency for the CPA firm or they do it themselves with the bookkeeping software or they hire a Payroll Service.
  • The Accountant’s Operational Setup Choices:
  • Manually handle sales, purchases, inventory, invoicing and document processing
    • Implement specialized software Dealer Management System (DMS) such as Lightspeed DMS 2
  • Combine and adapt generic Point of Sale software with in-house accounting or online software
  • Go with our advice to let us help the dealer create a custom solution.
  • Rely on third party in-house bookkeeping software
  • Recommend they go to a seminar, learn about financial forecasting and do it on their own(LOL)
  • Let the accountant analyze his business and provide him with an accurate, professional Financial Forecast.
  • Use the Point of Sale/Inventory Management features of a specialty DMS or generic POS system
  • Work with the accounting firm to craft a custom solution.
  • Buy marketing management software
  • The dealer takes on the tasks of acquiring comprehensive knowledge of marketing, creating, implementing and managing a marketing program.(LOL again!)
  • Consult with the Accountant to re-establish a viable and dynamic Marketing Plan
  • Financial Forecasting Choices for the Accounting Firm:
  • The CPA’s Inventory Management Choices:
  • Marketing Management Choices:

The Problems Specific to Beasley Honda Yamaha and How the CPA Solved Them

Even though I managed the business for years, the previous owner, Charlie, knew he was close to retiring; therefore, he was resistant to major upgrades or changes to structural systems. Consequently, I had to shoulder all the burdens of upgrading and improving operational systems, including Accounting – along with Financial Forecasting, Operating Procedures and Inventory Management. Additionally, Marketing activity was virtually non-existent. The lack of advertising and promotion was the primary cause of Charlie’s depressed sales and loss of market share. Charlie actually once said, “Advertising is a waste of money. Your customers do all the marketing you need through ‘word of mouth’. Keep your customers happy and they’ll keep on growing the business by spreading the good word.”

From the CPA: How We Handled Beasley’s Accounting Challenges
They originally did their bookkeeping manually, hand writing GL entries on pre-printed ledger sheets, adding sales by department from source documents – vehicle Bills of Sales, parts receipts and repair orders. At the end of each month, they delivered the sales journal, check stubs, and bank statements to our firm for processing into a month-end report. They wrote paychecks every week, getting tax rates from the government booklet and recording the figures on the paycheck stubs for the Accountant to pick up at month end. At year end, we and the dealer went through the Trial Balances, Reconciled any differences and then the firm prepared Beasley’s tax returns, W2s & W3, Sales Tax, Inventory Taxes and Unemployment Tax.

They plodded through this imbroglio of interconnected tasks for fourteen years, and then they converted to in-house bookkeeping software to handle most of their lower level transactions employing our CPAs for Financial Forecasting, Payroll Tax Compliance, Income Tax Returns and other accounting functions. The ability to pull up reports, current to any time frame, the convenience to edit transactions on the fly and to access critical information, such as Vehicle Inventory up to the minute. The problem with in-house software is the GIGO (Garbage In – Garbage Out) paradox. Mr. Beasley couldn’t really trust the program to do accurate analysis or forecasting. It is crucial to the success of the business to involve your CPA in virtually all bookkeeping and accounting functions (and if your accounting firm is capable, there should be a collaborative relationship with them in operating paradigms on every departmentalized function of the company).

How Accountants Managed my Operational Plan
They started out using Charlie’s antiquated manual procedures. In 1994, they installed very simplistic Point of Sale software that created invoices at the cash register for parts & accessories and service labor, managed inventory at a basic level and provided various end of day reports. They still manually managed New & Used Vehicle sales & inventory and F&I Income.

Five years later, the owner bought a fantastically detailed and thorough Dealer Management System specifically designed for motorcycle and Powersports dealers. It featured invoicing, Accounts Receivable, inventory management, Labor Hours – time management, Vehicle sales, acquisitions, new & used vehicle inventory and it treated F&I Income as a separate and distinct department of its own, thus providing detailed reports and analyses on a Sales / Cost of Sales basis. The initial cost of installing the software and required hardware was over $35,000, a very large IT expenditure for this size company. Ongoing expenses i.e. monthly support charges, periodic updates of software and hardware, supplies & equipment maintenance and annual renewal of the Licenses totaled more than $8,000 per year. After about three years of using and paying for the DMS, Beasley decided to cut their losses (almost $60K to date) and not renew the program.

They found another basic point of sale system called Retail Boss POS, for parts, accessories & Labor invoicing and inventory control. Mr. Beasley paid $89.00 for the Gold Version. Period. He paid almost zero for support, maintenance or any other fees except a $20 software upgrade every couple of years. They went back to manual handling of vehicles and F&I. Using end of day batch entries, they turned their eod records over to the CPA every week. The combination of Retail Boss and our CPA firm proved out to be the best to date and he stuck with it until the end. 3

How CPAs Solved the Problem of Obtaining Accurate Financial Forecasting:

The CPA accomplished this necessary accounting function along with the CPA’s Accounting Solution. He said he will always employ my firm for work in this area. That’s job security, Reckenen.

How the Accountants Overcame the Challenge of Efficient Inventory Control:

Inventory Control and Management were critical functions of Operating Procedures interlocked with Accounting Processes. The CPA doesn’t need to repeat the steps we took over the years of my firm’s involvement with the company. The owner believes they now have the optimal system for Beasley Motor Co., Inc.

Re-Create a Marketing Plan

In the early days of Beasley Honda Yamaha, the internet didn’t exist, there was no email, no cell phones, tablets or Personal Computers. On a local level Beasley’s advertising choices were radio, TV, newspaper, billboards and shoppers like “penny savers”. They were all very expensive, especially for small companies like theirs and marketing Return on Investment generally approached zero. It turned out that the shoppers gave them the biggest bang for the buck. Radio was second; therefore, they focused their ads in those two media, with the balance of their budget set aside for direct mail and in-store promotions. The CPA calculated the marketing budget as a percentage of operating profit, adjusted for reasonable growth expectations. The Accountant also showed them how to track the ads, compare results and figure the ROI of each campaign.

As the IT world exploded in the nineteen-nineties and the two-thousands, they gradually phased out of traditional ad venues and into electronic marketing: Websites, SEO, AdwordsAdsense, Email and later on to blogs. Their cost per conversion went down, sales and gross margins went up and ROI leapt skyward. Mr. Beasley could then prove to Charlie that advertising doesn’t have to be wasted money. 4 5

Macro Challenges Retailers, Especially Motorcycle Dealers, Must Mitigate to Survive 6

Dealers for Cars & Trucks, RVs (Motor homes, Campers), Boats and Motorcycle & Powersports suffer similar problems that they can either solve – partially or wholly – or not solvable at the dealer level. These include:

  • Fluctuating Demand: Sales can gyrate up and down from one year to the next due to a good or bad economy, unemployment, gas prices, inflation and in the case of Boats, Motorcycles and Powersports, the overall weather conditions.
    • Dealer Actions: Sales incentives, increased marketing activity, salesperson bonuses, etc. The obvious caveat is reduced profitability
  • Interest Rates: High interest has buried many a dealership. For consumers, a 1 percent uptick in bank rates could knock many of them out of the market. Since most people finance these big purchases, dealers could lose significant sales. For dealers, floor plan interest is one of their largest expenses. With the low margins in today’s environment (and getting lower), a 2 percent rise in interest could effectively cut profit per unit by a quarter or a third. Big car dealers typically stock over $10 million in inventory, so 2% is a lot of dough.
  • Dealer Remedies: Dealers can do nothing to affect interest rates except maybe vote for a Republican. They can, however, get creative on the showroom and make offers to the customers, like paying the first year’s interest in the form of an up front rebate or cash back
  • Dealer Solutions: Start up their own online P&A store to directly compete with the independent web stores. This can be risky, of course. Remember, 75% of new businesses fail, so be careful. They can also ramp up marketing efforts, particularly their organically based customers. They must remember to keep ROI in perspective; excessive expenditures could be counterproductive and detrimental to their financial bottom line.
  • ​Competition for Parts, Accessories and Service: All dealers rely on ancillary products and services for a large part of their income. These items have far higher margins than the vehicles do. New shops and stores are popping up every day selling tires, oil changes and services such as wheel alignment. Online and brick & mortar parts & accessories stores take more market share away from dealers every year.

Your CPA Firm and Collaborative Accounting
Assuming they are sticking with their out-sourced Accountant, they want to take full advantage of the firm’s novel idea of “Collaborative Accounting” (CA). They still get the traditional services like invoicing, payments and tax functions, but with CA the Accounting firm works with them and their department heads to understand the business. The CPA analyzes operating and marketing procedures, tax compliance and an overall view from the financial perspective. Internal standardization of protocols provide synergies to help improve the company’s growth rate and achievement of their goals. The CPAs recommend that they contact Reckenen Accounting, one of the premiere Collaborative Accounting Firms in America and arrange a Free Consultation. 7

 

1 http://hbswk.hbs.edu/item/6591.html

2 http://www.adplightspeed.com/powersports/

3 http://www.retailbosspos.com/default.htm

4 http://www.google.com/ads/adwords2/

6 http://www.firstresearch.com/

7 http://reckenen.com/

Reckenen AICPA Membersoc examination reckenen vscpa Arlington Chamber of Commerce Northern Virginia Technology Council quickbooks outsourced bookkeeping bill.com outsourced bookkeeping Spring Ahead Partner better business bureau