Over the years I have been in hundreds of dealerships. Everywhere I go I hear dealership staff yell out “bill that to the sales department!” or “bill this to the service department!” Do you ever wonder what these types of transactions are and their related impact on your dealership’s accounting? Who is really paying for these things that are “billed” to each department anyway? I hate to be a buzzkill here but the dealership is paying for them. More specifically you, the dealer principal is paying for them!
Internal transactions happen in every dealership no matter what dealer management system you are operating on. In most dealerships we have setup accounts receivable accounts to take care of these types of things. Some of you have AR accounts setup with titles such as “Sales Department,” “Service Department” and “Shop Supplies.” The purpose of such accounts is to accumulate the transactions and then manually move these balances in them to the profit and loss statement as expenses on a monthly basis.
Normal right? The answer can be misleading.
Some dealers do proper accounting and review these accounts on a monthly basis. Some verify every transaction and the purpose for it. For example, for shop supplies, we verify through reprinting a parts invoice to make sure that the charge was legitimate. Another example is a policy expense or good will adjustment for an unhappy service customer. We at PMC strongly recommend that you audit these internal accounts every month.
The easiest way for an employee to steal or cover up a mistake is to charge repair orders or parts tickets to these internal accounts. Just like having strong internal controls on cash every dealership needs to protect their time and their inventories from internal theft by looking at or auditing every internal transaction on a regular basis.
I have seen many dealers have huge balances in these internal accounts receivable accounts that never get resolved. They just grow and grow and grow. No harm no foul right? Wrong! If you allow these amounts to go unaccounted for your balance sheet is over stated and your profit and loss is understated. One dealer I know has over $30,000 in internal charges accumulate over a period of 3 years and left those balances in accounts receivable and let it ride! At some point this dealer will have to face reality and take a one-time hit for $30,000 to their bottom line. When this happens it will be a hard pill to swallow.
Another issue that I have found is that of instead of charging parts and accessories to a major unit sale, they charge them to “internal sales.” Why, I ask? The response that I usually get is that the sales manager does not want those items to affect the profitability of the deal! Are you kidding me? Yes, it is true this kind of thinking still exists in the powersports industry. In order for your deal to reflect true profitability you have to charge all costs to that major unit. Another issue I hear is that we have to internal those parts & accessories because the deal is already closed. Guess what? In most dealer management systems, you can charge those items to closed or finalized deals.
Our suggestion here at PMC is to validate or approve every transaction that gets billed internally by the general manager or the owner of the dealership. Another suggestion is to send the internal invoice to accounting so that they can review and make the proper adjustments to the profit and loss statement each month. One general manager of an accounting client of ours personally requires reprints of all internal transactions, determines the right accounting or expense account, and then follows up with items that are questionable. This is a dealership that is all about internal controls and protecting dealership assets.
So the next time you hear someone say “bill it to the sales department!” or “bill it to service!” you should be cringing because at the end of the day it is you, the owner of the dealership, who is paying for this stuff.
Remember: It is OK to bill certain things internally, but always be on the lookout as to why. Are your staff processing things normally through an approved procedure? Is someone trying to cover up a mistake so that no one finds out about it? Or worse, are they stealing from you?
Just food for thought.
Forrest Flinn, MBA, PHR, SMS has been in the motorcycle industry for more than 20 years and has been a true student and leader serving in various capacities. He previously worked as an implementation consultant for Lightspeed and as a general manager with P&L responsibility for a large metro multi-line dealership. Currently Forrest is the managing partner and chief visionary for a consulting firm that specializes in outsourced accounting, human resources, social media strategy, dealership operations consulting and Lightspeed/EVO training.