Have you ever had to go ask the boss to invest cash in the store because the bank had a balance of $50k and todays payoffs are $200k?

Maybe you’ve lost money in a new store for several months and you’re chewing through cash fast enough to make your head spin and create some sleepless nights.

what’s the bosses first question….. what did you do with my cash?

Not an easy question to answer, it rarely leads to a single account or even just pointing to the losses of the last several months. Sometimes you might not even be losing money but cash is getting tied up on the balance sheet. Being able answer this question concisely and with clarity can build confidence between you and the owner, and when warranted and understood get you that cash infusion you need to get your floor plan source paid, payroll covered or checks paid at the bank. Nobody wants to run it this close but this reality does occur, sometimes even when you are selling a lot of vehicles. Here are some tips about how to break it down for the boss.

You can start where most accountants start- the working capital calculation- it’s on the factory statement anyway. This is more of a calculation to determine if enough cash has been invested in the business, but it doesn’t tell you if you have enough free cash to play the game. I would suggest that unless the store is cash rich this isn’t the best calc to use in its basic form. To get a clearer picture of free cash and not working capital requires a modified version of the calc. To find free cash use the following formula; use only non inventory assets in the current asset section and including only the equity or negative equity in new and used flooring plus other current liabilities as part of the current liability section of the balance sheet to complete the calculation.

Why use this Calculation?
The inventory section of current assets simply isn’t liquid enough to help you with your Daily Cash demands. This is real world stuff here, so while the basic calculation tells you if your balance sheet is healthy overall, you need to have free cash to pay daily obligations and the basic calculation will mask your ability to keep up with the uneven collection of CIT and other receivables like factory ar and parts and service ar VS the demand of paying off daily floor plan and meeting the cash demand on the bank account. Floor plan payoffs and dealer trade checks account for a lot of the volatility of daily cash swings. Add to that the vehicles you can’t floor because of titles not received yet and it’s a recipe for disaster.
Using the modified calc you can determine if you have actionable liquid receivables that can be collected and make you cash healthy again or if even after collecting the CIT and other outstanding AR’s you are still going to be looking at a cash deficit that is going to require a cash infusion. When you look at the details of these receivables you will be able to determine the timing of when the demand for cash will be at its greatest. Remember we are talking about real world here, not an accounting standard but what’s gonna help you survive without being surprised. The modified calculation helps you teach your management team to understand how collecting CIT outside of the payoff period to your floorplan source eats your cash like Godzilla and how paying the floorplan is not the only demand for cash impacting the day to day bank drain. With the current shift to more non prime paper, funding times are increasing beyond the payoff of floorplan window in many cases.
While most managers don’t want to be accountants, they usually do want to be good business people and this modified formula helps them learn the dynamics of the balance sheet without forcing them to derive the conclusions on their own. More importantly it helps you answer the question for the owner, here is where your cash is tied up and why we didn’t need cash yesterday and today we do.