Before dealer principals and store managers brush aside the issue by stating something like, “I’m a car guy, not an accountant,” NADA Academy instructor Eric Dreisbach shared eight potential pitfalls of a financial practice many dealerships might use — work-in-process (WIP) accounting.
In a blog post setting up his foundational concerns, Dreisbach explained that officially work-in-process (WIP) labor is considered an inventory of labor purchased from technicians. He said that inventories are considered assets and carry a normal debit balance.
Then Dreisbach went into the potential quandaries, especially if the dealership has a busy service drive stacked up with customers needing repairs along with reconditioning of units that managers are eager to get on the front line.
“The problem is that repair orders are typically posted before the technicians are paid,” Dreisbach said. “For example, when a technician completes his work and the RO is closed, it usually gets posted within a day or two.
“However, the technician does not get paid until the end of the pay period, a week or two later,” he continued. “This leaves a credit balance in the WIP account for that time period. Credit balances in inventory accounts are not usually accepted by the manufacturer or by generally accepted accounting principles.”
Whether or not a dealer has competent accountants either on staff or secured through another firm, Dreisbach used a separate blog post to explain eight common reasons errors can happen within WIP accounting. Those elements included:
—Tech pay raise is recorded in the payroll settings but is not updated in the service settings. This will typically result in a growing debit in the account.
—Tech bonus pay posted to WIP but not costed on the RO. Dreisbach recommended using a separate account for tech bonus pay. A store may use a cost of sale account or another payroll expense account. He said this makes it easier to track and will keep it out of WIP. “Use caution since this may impact the service manager bonus,” he added.
—Hourly technicians may be costed out on the RO but paid out of other salaries and wages. Check your DMS settings.
—Wrong technician flagged on the RO. Tech 23 versus Tech 32 for example.
—Miss-flagged/miss-posted pink tickets. Sometimes 0.3 can look like 0.8
—Unapplied labor posted as regular flat rate pay. You may flag a tech for work not costed on a RO, snow removal for example.
—Excessive open RO’s. Repair orders should be closed in a timely manner.
—Fraud. Sometimes only found if you are looking for it.
Along with some of the suggestions already mentioned, Dreisbach also offered this broad recommendation to help dealerships.
“I suggest posting the credit from the RO directly to a payroll payable account, bypassing the WIP account,” Dreisbach said. “The payroll process will then debit payroll payable and clear out the balance. Simple, accurate, and no need for extra posting and gyrations at month end.
“But whether you see work in process as an inventory asset or a liability, you must have this account on a schedule and control it by the repair order number,” he continued. “Setting up a schedule will require a bit of reconciliation but errors and omissions will show up quickly and will help keep your books tidy.”
Dreisbach’s discussions arrived as the National Automobile Dealers Association is gearing up to host a financial management seminar.
In this week-long seminar, NADA instructors Heather Westman, Jeff Breeland and Thomas Shaughness will introduce key dealership accounting principles and how to navigate both the balance sheet and income statement at the dealership and department levels.
“You’ll learn how to interpret and analyze financial statements to identify performance improvement opportunities,” NADA said while adding that some of the other key areas to be covered include:
—Maximizing cash flow and profit
—Identifying frozen and working capital
—Evaluating inventory performance
—Calculating total absorption
—Analyzing sales and gross profit
—Controlling and minimizing expenses
The training event begins on April 23. Registration can be completed at this website.