Tim Humphries, former Group Financial Director, Beadles Group, explains why businesses need strong financial controls, some specific to this sector.

All businesses need strong financial controls as part of good practice and good governance. Some of these controls apply to all businesses (debt management) and some are specific to our industry.

There are also some additional controls that are required due to the added complexity of operating a multi-site and/or multi-franchise business. All controls should be risk based, and this added complexity obviously increases some risks and introduces some new risk areas.

As an ex auditor (albeit a long time ago), my focus has always been on the balance sheet. This is the foundation of the accounts, and if the balance sheet is right then the profit will be right. The motor trade has a history of focusing on the profit and loss account, with the balance sheet typically being the last page on the management accounts that no one looks at. This has changed over the last 15 years or so but if you don’t look at your balance sheets monthly then I would urge you to do so.

Obviously, in an article it is not possible to detail all the financial controls that a dealership or motor group should operate, but from my experience these are the key questions we should be asking in developing those controls.

Stock

  • What is your vehicle age policy (new, pre-reg and used), how is this managed and who calculates any provisions? Can cars be moved around sites and what are the policies/controls?
  • What is your parts age policy, who carries out any provision calculations?
  • Do you have an age policy on WIP and how is this managed?
  • What stock checks do you carry out (cars and parts), how often are they carried out and who does them?
  • Are the stocks reconciled to the manufacturer (floor plan) statements?

Debts

  • What is your policy on reviewing all debts (vehicles, general and warranty)?
  • Do you have a provision policy that is tailored to the type of debt (e.g. shorter for vehicles than for general debts, or consistent with manufacturer payment terms for warranty?)

Manufacturer bonuses

  • Who calculates what bonus is due and do they have to evidence it?
  • Does someone else review/sign off the vehicle bonuses on a regular basis?
  • What is the provision/write off policy and who controls this? Is this policy consistent with the manufacturer payment terms?
  • Who is the expert in these bonuses? Do you have more than one expert who can check/verify the basis of any accruals/calculations?

Other

  • What is your policy on recognising a vehicle sale? Is it documented and how do you check it is being followed?
  • Who authorises credit notes and how are these checked against a report of credit notes issued?
  • Do you check that the closing balance sheet and opening balance sheet agree?
  • When doing your checks, are all reports run at the same time to ensure transactions can’t be hidden? Are your checks always at the same time or do you carry out unexpected checks?
  • Do your accounts teams produce a month end file? Who reviews this?
  • Do you check for any unusual VAT amounts on a regular basis?
  • Who calculates staff commissions/bonuses? Are they independent of the recipients? Who authorises new starters and your payroll payments?

As businesses grow and get more complex, the owner/manager or directors have to focus more on strategy and managing the business, and the detail is carried out by other people. The detailed knowledge at the top of business, in how the manufacturer operates, what their margin structure is, and when they pay warranty etc., has to be managed by others. It’s only by having a robust set of financial controls that those senior managers can be confident that their business is as secure as possible. We can never remove financial risk, but we can manage and mitigate it.

My final thought is to pass on some advice I was given many years ago but that still holds true today; “You get what you check, not what you expect”. Controls are only effective if they are managed.