Is Your Financial Data Accurate? – A Case Study

In the last newsletter we talked about how a shoe box accounting system can cost you profit and possibly much more. So you go out and get an operating system to manage your accounting, but we all know that computer systems are only as good as the people using them. We have all heard the expression, "garbage in, garbage out" and no truer words could be spoken, demonstrated by the following case study. Read more.

I was contacted by a dealer who was very concerned about the future of his business. His company had suffered like so many others as a result of the recession and as a consequence his bank called his operating line of credit loan. They agreed to renew the loan on a month to month basis on the premise that it would be paid down in significant amounts each month.

We did a Financial Performance Analysis to identify how the company had performed over the last 5 years and what the current status was of his ratios, percentages and margins. As part of the dealer's efforts to improve his business he had a new operating system installed just around the time the loan was called.

It became apparent as I prepared the performance analysis that there was a significant problem in the parts department. The company was only realizing a 10% margin on parts sales, which is pretty much impossible when the normal MSRP is approximately 34%. Consequently, I started asking questions:

Is the Parts inventory valued correctly in the operating system?

Is the billing system using the correct MSRP?

Is there a significant problem with theft out the back door?

What made this even more puzzling was the fact the dealer had managed to pay down a significant portion of the operating line of credit in the last four months. The immediate question is how is that possible if you are not making profit? With the exception of the parts margins, the performance ratios were for the most part very good as well as the expense percentages.

Armed with the information from the performance analysis and my suggestion he went back to the operating system supplier, had the system conversion reviewed for accuracy and completeness from his historical data.

The next set of monthly financials I received showed a significant year to date profit and a parts margin of 36%. The end result was that the data had not been uploaded accurately, which was corrupting all the financial results.

How important was this? Well it almost cost this dealer his business, because his creditors were basing decisions on poor results, when in fact the business was thriving.

This is why financial management of your business is so important. It allows you to identify problems on a monthly basis by insuring your accounting data is accurate when questions arise. Your business speaks to you through your financial statements, so it is imperative we make sure they are telling us the right story.

If you are concerned about your results, contact me for a free consultation. You have nothing to lose but potentially a lot to gain.

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