This week, I spoke with a potential client struggling with dealership cash flow—an issue that should be top of mind for every dealer, especially given today’s economic uncertainty.
Having been in this business through the ’90s, early 2000s, and the Great Recession of 2009, I’ve seen firsthand how market shifts, consumer behavior, tighter flooring rules, and other financial pressures can force dealerships to close their doors. Maybe that experience has made me more cautious than most, but one thing is certain: when economic conditions get tough, positive cash flow—backed by strong systems and processes—can mean the difference between survival and success.
Poor dealership cash flow sucks.
For those who’ve never experienced poor dealership cash flow, let me tell you—it’s not a situation you ever want to be in. What does it look like?
- Falling behind on flooring payoffs
- Struggling to make payroll
- Delaying payments to even your most trusted vendors
- Customers calling weeks after a trade-in, furious that their payoff wasn’t made and demanding reimbursement for an auto-deducted payment
- Paying penalties and interest for missing sales tax or other regulatory deadlines
Beyond the numbers, poor cash flow suffocates momentum.
It replaces a thriving, high-energy store with a heavy, relentless stress that weighs on everyone. Even the most seasoned car professionals feel the toll.
Lately, I’ve seen signs that some dealers and GMs are not prepared for a potential downturn in consumer confidence and the economic ripple effects that follow. I hope I’m wrong. I hope the industry weathers the storm without major disruption. But wouldn’t it be far better to identify and eliminate cash drains now—before the pressure hits?
7 Top Cash Drains in Auto Dealerships
To help you and those you love weather the storm, I’ve compiled a list of the top dealership cash flow killers, along with ways to improve your process and live to tell about it.
1. Disorganized Deal Flow
There’s an old car business saying, “There ain’t nothin’ you can’t sell your way out of.” Well, let me tell you, poor cash flow is the outlier. You can sell a bunch of cars and still have bad cash flow. How? By allowing a broken deal flow process.
I’ve always been a process gal and this comes from working with dealerships where business that flows into the accounting office doesn’t actually flow at all. I have a proprietary 3-day close® process that I’ve used for 20+ years. It was borne out of a need to streamline things while severely understaffed. Here are the three simple tenets of my deal flow process:
- Every deal is booked within two working days.
- Daily reporting on what’s outstanding re: deals funded, flooring and trade-in payoffs made.
- Weekly schedule reconciliation.
2. Poor Collections Process for Receivables
The higher the volume store, the larger the receivables. Here are the top three as far as dollar amounts:
- Vehicle
- Warranty
- Factory Incentives
My 3-day close® process I mentioned earlier includes Fixed Ops. Every CP, Internal and Warranty RO, along with every parts ticket and vendor invoice is accounted for every single day with most being closed out daily. This allows the pulling of specific schedules that track every customer receivable, vehicle receivable, warranty receivable and factory receivable. Through the process you’re able to keep a tight reign on monies due and therefore dealership cash flow is optimized.
3. Unchecked Expenses
The largest variable expenses in a car dealership that can become cash drains are:
- Advertising
- Floorplan
- Payroll/Personnel Expense
What can you do to not let them become cash drains?
Advertising
Every advertising dollar spent should be accounted for with a Purchase Order (P.O.) initiated by the GM, Dealer, or whoever oversees advertising. While some have pushed back on this policy over the years, the reality is that skipping this step is simply poor financial discipline.
A P.O. system ensures transparency and accountability. When the accounts payable team processes vendor payments, they should never have to guess what an invoice is for. With a clear P.O. in place, they know exactly what was approved, eliminating confusion, reducing errors, and preventing unauthorized spending.
Implementing this process isn’t about adding bureaucracy—it’s about controlling costs, improving financial oversight, and ensuring that every ad dollar is spent wisely.
Floorplan
Conducting a monthly physical inventory is essential—but it does not mean relying on the flooring bank’s audit as a substitute. Flooring audits only account for floored vehicles, meaning cars that aren’t on the floorplan could go unnoticed, leading to discrepancies and potential financial blind spots.
By performing your own physical inventory and pairing it with a monthly flooring reconciliation, you gain full visibility into the dealership’s actual inventory. This helps:
- Identify missing or misplaced vehicles
- Catch errors before they impact financial statements
- Ensure accurate inventory valuation
- Maintain tighter cash flow control
Don’t leave this process to the flooring audit alone. A proactive monthly inventory check is the key to staying on top of your dealership’s assets and preventing costly surprises.
Payroll/Personnel Expense
The reality is that dealership payroll is one of the largest ongoing expenses, but it’s not inherently a cash drain—it’s simply a fundamental part of running a dealership. When properly planned and managed, payroll ensures that your team is motivated, productive, and aligned with the dealership’s financial health.
However, without the right controls in place, payroll can quickly spiral into a major financial burden. Unchecked overtime, excessive commissions, bloated staffing levels, and inefficient pay structures erode profitability.
In short, payroll itself isn’t the problem. The problem arises when it’s not carefully controlled.
This is why every dealership needs a highly skilled, experienced professional overseeing payroll—someone with deep expertise in dealership accounting. Anything less, and you’re inviting trouble.
Why Payroll Requires Expert Oversight
Payroll isn’t just about cutting checks; it’s a complex, high-stakes operation that demands specialized knowledge:
- Accounting Complexity – Payroll involves intricate calculations, tax compliance, and financial reporting. Errors or mismanagement can lead to costly penalties, cash flow issues, and even legal trouble.
- HR Compliance – Payroll extends beyond accounting—it’s also an HR function requiring clear policies and procedures.
- Hiring & Termination Risks – In highly litigious states like California, handling hiring and terminations incorrectly can expose the dealership to significant legal risks.
- Employee Benefits Management – Benefits administration is a moving target, with annual audits, compliance requirements, and cost assessments that must be handled with precision.
- Workers’ Compensation & Risk Management – Ensuring compliance, enforcing dealership policies, tracking harassment training, and mitigating risk are all critical to avoiding lawsuits and penalties.
- Checks & Balances – Payroll fraud is a real and costly risk. I recently heard of a dealership where the controller had been paying three fake employees—who were actually herself—for seven years, cashing the fraudulent checks undetected. Without proper oversight, these schemes can go unnoticed for years, draining dealership cash and of course, profits.
At the end of the day, payroll isn’t just a routine administrative function—it’s a financial lifeline that requires rigorous oversight, strict controls, and experienced leadership. If it’s not managed correctly, it can become one of the biggest cash drains in the dealership.
Don’t overlook other common dealership expenses either.
- Policy adjustment
- Outside services
- Data processing/IT expense
Every expense that’s out of line – either by average dealership historical standards of via the specific metric of Expense Percentage to Gross Profit – should be reviewed and analyzed every month and finalized before the financial statement is produced.
4. Absence of Good Asset Management
The two main dealership inventory assets are:
- Vehicles
- Parts
To keep two of the dealership’s largest expenses—new/used vehicle inventory and parts—from turning into cash killers, strong asset management protocols are essential.
Vehicles
- Used Vehicles
- Any used car that sits on the lot for more than 90 days should be written down by 2-3% to reflect its declining market value and improve turn rates.
- Implement “Smart Acquisition” practices by setting clear guidelines on which vehicles to acquire through trade-ins or purchases. This ensures you’re bringing in inventory that aligns with market demand, profitability, and your dealership’s sales strategy.
- New Vehicles
- Any new car held in inventory for over a year should be written down to account for depreciation and market shifts.
- By proactively managing inventory with structured policies, you can prevent aging vehicles from tying up capital, eroding profitability, and ultimately becoming a drain on cash flow.
Parts
Here are key protocols to optimize parts inventory management and improve cash flow:
- The DMS is your friend. It will provide real-time insights into sales trends, inventory movement, and customer behavior. This allows for more accurate forecasting and inventory control.
- Regular inventory counts. Conduct physical inventory counts at least bi-weekly to maintain accurate stock levels. This practice helps identify discrepancies, prevent shrinkage, and ensure the inventory system reflects reality.
- Turnover goals. Set specific inventory turn goals to minimize holding costs and improve cash flow.
- Manage slow-moving inventory. Identify and liquidate dead or slow-moving inventory to free up cash and space. Consider offering discounts or bundling slow-moving parts with faster-selling items to accelerate sales.
5. Neglecting Reconciliations
Regular account reconciliation is the most effective way to ensure that a dealership’s operations and financial processes are working as they should. Yet, I’ve seen far too many dealers overlook this critical step—and just as many controllers who simply don’t prioritize it.
Neglecting reconciliations doesn’t just create accounting headaches; it opens the door to undetected errors, fraud, and serious cash flow problems. To stay financially healthy, dealerships must enforce a disciplined reconciliation process:
- Daily: Bank reconciliations to catch discrepancies and ensure cash flow accuracy.
- Weekly: Accounting schedule reconciliations to identify issues before they snowball.
- Monthly: Reconciliations for flooring, incentives, sales tax, prepaids, and payables to maintain financial control and compliance.
When reconciliations are done consistently, they serve as an early warning system, catching problems before they become major financial nightmares. If a dealership isn’t treating this as a priority, it’s time to start.
6. Lack of Cash Controls
Cash Controls are a key line of defense against fraud. They are often overlooked, but they are absolutely essential for protecting a dealership’s financial integrity. One of the biggest mistakes I see is having the same person responsible for both preparing the bank deposit and reconciling the bank account. This creates a serious risk for fraud.
The same principle applies to any cash-related duties in the store—whether it’s handling petty cash, managing customer payments, or dealing with refunds. To minimize the risk, separate duties so that no one person has control over both the opportunity and the temptation to commit fraud.
By implementing dual control—a checks and balances system—you create an environment where fraud is far less likely to occur. It reduces temptation and ensures accountability, keeping your dealership’s cash flow secure.
7. Inadequate or Unreliable Reporting
Accurate, well-organized financial reporting is the lifeblood of a successful dealership. It’s essential not only for securing lending opportunities and maintaining relationships with current lenders and manufacturers but also for making informed business decisions, calculating commissions, and driving growth strategies.
To effectively manage the dealership, these four key monthly reports should be a non-negotiable part of a dealership’s financial process:
- Monthly Financial Statement – A comprehensive overview of the dealership’s financial health, providing insights into assets, liabilities, profitability, expenses, and cash flow.
- Monthly Forecast vs. Actual – A comparison of projected performance versus real-world results, helping identify trends, gaps, and areas for improvement.
- Monthly Expense Detail Report – A breakdown of expenditures to track spending, control costs, and prevent waste.
- Clean, Reconciled Accounting Schedules – Ensures that all accounts are accurate, up to date, and free from errors or discrepancies.
If any of these reports are missing from your dealership’s routine, now is the time to implement them. Strong financial reporting isn’t just a best practice—it’s a necessity for long-term success.
If your organization is missing any of these reports and/or protocols, or you’d like to talk to me about implementing any of the above processes I recommend, please contact me here. I’ll get back to you within 24 hours.