Focus on converting top line revenue into actual operating cash flows
What is the actual purpose of a business? What are you really trying to accomplish? Why are you grinding it out every day, dealing with customer issues, employee matters and OEM demands? What is the overriding goal of your automotive dealership?
The answer: The mission of every business is to convert top line revenue to actual operating cash for investors!
Owners who carve this ethos into their company will run a healthier business. While selling is critical, it is far more important to translate those sales into actual cash that you can use to run your business.
Things like over purchasing inventory, not collecting receivables (OEM, warranty and customer) and sheer over spending on headcount, advertising, IT and the like will deplete your cash flows very quickly.
If cash is king, then operating cash flow represents the whole empire. By definition, operating cash flow includes all cash generated by a company’s main business activities. Think about it, if you can’t generate cash by selling and servicing cars, then why are you even turning on the lights each morning?
In many ways, the calculation of operating cash flow closely represents EBITDA (Earnings Before Interest Taxes Depreciation & Amortization). This is often used to value your business and is a key performance indicator for most business owner’s success. Isn’t that the reason people get into business anyway?
You want to build a company that increases exponentially in value, so much so that you’re inclined to sell it in the future and live the life of luxury. Wouldn’t that be great!
Time and time again we see poor management decisions resulting in a large variance between revenues, profits and ultimately cash flow. Dealers can be generating millions of dollars in sales but, at the end of the month, have no money in the bank.
Examples of this include: overbuilding your facility, holding inventory too long, over staffing and overpaying people, selling to customers who are not credit worthy, overspending on advertising in hopes that it will generate more sales, poor warranty claims process, etc. This list can go on and on. The point here is that great leaders see their businesses past the income statement. They understand the holistic impact of their decisions and are able to follow them through to cash receipt.
The implication of not managing this relationship is huge. Not having replenishing operating cash flow will quickly lead to your demise. Not only do you need enough cash to pay vendors, government agencies and employees but you need enough to grow your business too.
Staying stagnant in the retail automotive space is unacceptable — OEMs, customers and employees demand constant improvements and growth.
It is, therefore, of utmost importance that dealers manage their financial heath with a specific focus on operating cash flow. Not doing so will lead to your failure.
Investors will take this concept one step further. They focus on Free Cash Flow (FCF) which is calculated as Cash from Operations less Expected Capital Expenditures.
In other words, how much cash will your dealership have from its core operating activities after spending what it needs to maintain its current capital structure — what a beautiful indicator of success for investors!
Smart investors love companies that produce plenty of free cash flow (FCF) because it signals a company’s ability to pay down debt, pay dividends or facilitate the growth of the business. Excess free cash flows will be used to either grow the company or pay back investors by way of dividend. This is always a nice thing!
Over the next little while, work to change the mission of your dealership from rolling cars to generating operating cash.
It’s a fundamental shift in thinking that will lead to a healthier business in the future. Running and growing your business is so much easier when you have excess cash to work with so make that your goal this year. Great things will happen when you focus on the right things.
Good luck!
