You’d be surprised what’s lurking in car dealership accounting records and financials. I’ve written and spoken about this a lot and nothing really seems to change that much. I’ve seen the same mistakes repeated again and again, with little progress toward improvement. While some dealers and general managers are aware of the issues and work to address them, for every one that does, there are countless others, and newcomers who enter the dealership ecosystem, who don’t prioritize clean, accurate financial records.
Car dealership accounting can be full of hidden disasters.
The result of these situations are often painful write-offs, lost profit and/or legal and compliance issues. Many of these powder kegs go unnoticed for too long, silently building up volatile issues that ultimately result in expensive consequences.
While this could provide me with a steady stream of clients for the foreseeable future, I’d much rather see accounting and financial “best practices” become the industry standard.
Clean financials aren’t just about compliance—they’re a direct path to greater profitability.
I’ve been around long enough to have experienced a time when manufacturers and retailers placed much more value on and dedicated far more resources to ensuring clean, accurate financial reporting. I’m not entirely sure what’s changed, but I am sure that it’s not just one or two factors.
While selling and servicing vehicles is rightly a top priority, keeping the financials in order should be viewed as equally critical to a dealership’s success.
Controlling expenses is the #1 concern for dealers. Get your FREE Dealer Self-Assessment to see how you measure up against manufacturer-specific benchmarks. Get it today!
6 car dealership accounting “worst practices” that jeopardize profitability
If you recognize any of these issues, now is a great time to take proactive steps and make improvements.
1. Not reconciling all bank accounts at least monthly.
Whoo boy, the things I’ve witnessed reviewing bank reconciliations. One time, it was so bad that the CPA firm was unable to perform a review and file the taxes. Another time, I spend about ten days reconciling a year’s worth of bank statements and when I was finished, I had over 2,000 reconciling entries. Yes, TWO THOUSAND.
You see, it’s one thing to reconcile the bank accounts, and it’s another to make the entries needed to correct the books to match the bank (and sometimes, vice versa).
When a dealership or auto group fails to reconcile its bank accounts regularly (ie: at least monthly), it can face several negative consequences, including:
Inaccurate Financial Statements. Bank reconciliation is crucial for ensuring that financial statements reflect the true financial position of the dealership. Without it, financial reports are inaccurate, leading to poor decision-making and the inability to properly assess profitability.
Fraud or theft going unnoticed. Reconciling the bank helps detect fraudulent activity, such as unauthorized transactions or employee theft. Without consistent reconciliation, fraud may go undetected, resulting in significant financial losses.
Cash Flow Issues. Unreconciled accounts can lead to discrepancies in cash flow tracking, causing the dealership to overestimate available funds. This can result in insufficient cash for day-to-day operations, payroll, or inventory purchases.
Missed or duplicate payments. Without reconciliation, dealerships may accidentally miss payments to vendors or lenders, which could harm relationships and even result in late fees or interest penalties. Alternatively, duplicate payments may occur, leading to unnecessary cash outflow.
Tax and audit problems. The first thing a CPA asks for (or should ask for) when she/he arrives at the dealership for a review is the bank reconciliations. Frankly, reconciled bank recs are a sign of clean, reconciled books. Dealerships are often cited penalties, fines, or even suffer legal liabilities when they can’t produce clean records.
Lost profits. Inaccuracies in financial records can cause hidden losses that compound over time, resulting in lost profits that could have been identified and corrected early on. I have personally witnessed millions in lost profits.
2. Absence of regular Schedule cleaning/reconciliation.
Many of the same issues that arise from not performing regular bank reconciliations happen when accounting Schedules are not reconciled. Schedules are simply general ledger accounts that need closer monitoring and helpful identification markers. These accounts tie directly to entries on the bank statement.
Without consistent Schedule reconciliations, inaccuracies can accumulate, causing overstated or understated balances. This of course leads to an incomplete picture of the dealership’s financial health. Unresolved balances may obscure critical issues such as missing payments, outstanding liabilities, or misallocated expenses, ultimately impacting cash flow and profitability.
I received a request to determine a dealership’s cash flow issue. I reviewed the dealership’s contracts in transit schedule and found at least part of the reason cash was tight. This schedule is used to track the payments of contracts from vehicle sales where payment is due from the customer’s lender. I found over $8 million due from banks, over 50% of it was 90 days past due. That explained their cash flow issue.
3. Unskilled team members in highly skilled positions.
Car dealership accounting is a highly specialized skill. Hiring skilled personnel is a major challenge for most dealerships today, and hiring untrained people without oversight is significant risk to the dealership’s profitability and stability.
A team member’s lack of experience often results in accounting errors, such as:
- Misclassified expenses.
- Mistakes in balance sheet reconciliations.
- HR issues.
- Struggle with compliance tasks, resulting in missed deadlines for tax payments, financial reporting, or audits, which could trigger penalties or legal issues.
The inability to properly manage a team and/or reconcile important accounts makes it difficult to detect fraud or internal theft, leaving the dealership vulnerable to financial losses.
Unskilled team members are often slower in processing transactions or resolving discrepancies, which can disrupt daily operations and delay critical tasks like payroll, vendor payments, and DMV issues. This inefficiency affects cash flow and damages relationships with suppliers and of course employees.
Finally, relying on under-qualified staff often requires more oversight and corrections from management, which when not properly managed, wastes precious resources.
4. Management not respecting the end-of-month deadlines.
I’ve often said that in truly successful organizations, the store’s GM and Controller work as one. I’ve had the pleasure of working with an entire management team that worked as one. Month-end deadlines were embedded in our process and everyone respected them. What was the result?
- Highly motivated team
- Interdepartmental support
- Positive employee morale
- #1 customer satisfaction rating
- #1 in sales, service and parts for the entire region
When management does not respect end-of-month deadlines, it can have a ripple effect of negative consequences throughout the organization. Delays in closing the books leads to:
- Incomplete or inaccurate financial reporting, making it difficult to assess the dealership’s true financial position. This can result in misinformed decision-making, as management won’t have access to timely or accurate data on profitability, cash flow, or expenses.
- Impacts external reporting obligations, such as tax filings or compliance with lender or manufacturer requirements.
- Late or inaccurate reports strain relationships with financial partners, up to and including a loss of credibility.
- Delays in month-end causes accounting staff to rush or forego their work in the following month, increasing the likelihood of errors, misclassifications, and missed reconciliations.
Operationally, not respecting month-end creates bottlenecks that slow down other business functions, such as payroll processing, vendor payments, and inventory management, disrupting the dealership’s overall efficiency.
Over time, this lack of discipline can erode accountability within the organization, lowering employee morale and leading to a culture where financial precision is not prioritized. Ultimately, this can hurt profitability, hinder growth, and cause long-term instability.
5. Lack of store-wide practice of good accounting habits.
In the management team I mentioned above, our credo was to instill leadership principles and foster every team member’s practice of those principles. While accounting is a scary subject for most of the store’s staff, I wanted to make it easier to understand so that the fear would dissipate.
Here are the tenets of my process to create a store-wide practice of good accounting habits:
- Manager’s meetings were held every Friday.
- We reviewed each department’s numbers on the financial statement and compared them to the forecast.
- We reviewed the Balance Sheet periodically where I explained what the Balance Sheet was, how it worked and where ‘dirty little secrets’ can hide.
- We invited anyone in the store to attend certain meetings where we discussed financials so that each team member could see exactly how their contributions impacted the stores’ success.
Inclusive transparency with departmental gross profit, expenses and net profit fostered an even more cohesive team that allowed each employee to support one another’s contributions.
6. Not requiring a monthly review by department managers.
Though every employee should be familiar with how their job impacts the bottom line, it’s most important for dealer principals, general managers, and other senior management to have a strong grasp of the financial statement, especially the Income and Expense Analysis. Learning how to read reports and becoming proficient in how the information ties to operations is crucial.
Store leaders must be ready to take action when the information is guiding them to make changes.
While it might appear that the accounting department should handle all accounting-related decisions and processes, this approach is flawed. Ignorance of accounting principles throughout the store can adversely affect financial performance goals. Performing a monthly expense analysis can save you from scary surprises.
It’s essential to train the other departments – sales, service, parts – and involve them in the oversight of their respective accounting activities and reporting. Include them in monitoring accounting processes, such as reviewing their related Schedules, circumvents errors that lead to serious future consequences. Errors such as mis-posting transactions, not collecting payments due, or incorrectly stating profits can lead to superfluous expenses that damage the entire business.
Controlling expenses is the #1 concern for dealers. Get your FREE Dealer Self-Assessment to see how you measure up against manufacturer-specific benchmarks. Get it today!