Deal Pack Blog
Financial Structure for a Growing Dealership
The story of a BHPH dealership or finance company can be seen in a set of their financial statements. Strong financial statements are not determined by the reputation of the company but by having information that is accurate and easily understood. A growing company will benefit greatly by having basic financial statements prepared periodically for complete analysis and comparison. This is only possible with an accounting structure that can accommodate and organize the different departments, branches and separate related companies that may be involved.
When income is generated from different divisions or departments of a single company, tracking each department separately will reveal where the company is making a profit and if any areas need to be improved. Departmentalizing a chart of accounts will break out the revenues and expenses between the divisions, allowing the profit and loss statements to be separated accordingly. Comparing this statement over periods will give business owners valuable information on which areas are increasing in value. An example of separate departments is easiest seen by looking at a BHPH dealership and their service department. Profit and loss for each department will cause a greater awareness throughout the company and the employees will be more focused. Once the departments are accounted for, it is time to focus on different locations.
A growing company will eventually open more than one location and create different branches of the same company. There can be many different branches and there will need to be financial statements for each. The main difference between accounting for departments versus accounting for branches is the allocation of assets and liabilities. Breaking these out in a chart of accounts is called multi branch G/L accounting and the idea is to diversify the portfolio causing the risk to be split out between branches. Once the branches are accounted for separately, the financial statements can be generated for each. The different financial statements that can be generated separately include the balance sheet, income statement, and statement of cash flows. Having these available allows for comparison and better decision making. When decision making is at its greatest, ideas flow and new companies are born.
After the multiple departments and branches are accounted for, the only thing left are the separate legal entities. A separate legal entity is essentially a separate company. An example of this is a dealership and related finance company (RFC). They are individually held responsible for their financials and legal matters. However, this does not mean that they have to have a different software. The way legal entities are accounted for is similar to how separate branches are accounted but there is a hierarchal relationship. This means an entity can have more than one branch but one branch cannot have more than one entity. Separate entities can be accounted for one of two ways. One way is to have completely separate chart of accounts, which is typically the case between the sales company and the RFC. Alternatively, the same chart of accounts may be used but must be split out using a decimal system. This allows the financial statements to be generated for the separate companies or combine them so the entire portfolio can be viewed and decisions made.
The decision as to which accounting structure to adopt will heavily depend on where the company is at in its life. If the company is new and just starting, departments may be the way to go. If the company has been around for a while and has multiple branches then a multi branch G/L is the way to go. When deciding on which direction to take, first think where the company is at and where it is headed. For example, if a car dealership currently has multiple branches and is looking to add a service department, deciding on if they want the service department to be its own separate legal entity will determine how it is accounted for. Creating the service department as a separate entity means not only will a multi branch chart of accounts be used for the dealerships but a separate chart of accounts altogether will be used for the separate service department. One main benefit of this separate entity is that if the service department doesn’t make it, the dealership is not affected.
When choosing an accounting software to track a company’s activity, be sure to confirm that it accounts for every possible scenario and financial statements can be easily generated. The software should have the ability to grow as your company grows. If the current software cannot accommodate the company’s growth, it may be time to find one that can.