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by Kenneth Shilson, CPA

I recently reviewed some buy here, pay here financial benchmarks which were generated and released by a nationally known industry consultant. After a careful comparison with my own database which was compiled from more than 150 of my buy here, pay here clients throughout the nation, I noted several material differences.

This article is not intended to criticize the author of the aforementioned benchmarks but rather to underscore the critical need for more financial consistency in the buy here, pay here industry! Here are some observations from my review of the above referenced benchmarks:

  • On buy here, pay here cars sold for a retail price of less than $ 4,000, the average gross profit on such vehicles was indicated to be only $ 1,433! My experience is that this number is too low by at least $ 400 - $ 600. However, no disclosure was made on how gross profit was computed by the author. In my experience, dealers frequently compute cost of sales differently through the inclusion or exclusion of different components which could cause significant gross profit variances. Therefore, it wasn't possible for me to reconcile my database to the above referenced benchmarks making them virtually useless for comparisons.
  • The same survey also showed that average reconditioning costs on cars sold for under $ 4,000 to be only $ 182 per unit. My experience reveals that reconditioning costs are computed differently by dealers as to the labor (sometimes none!) which is being allocated to the repairs. Generally lower cost vehicles will require more reconditioning costs (and labor) to run the life of the note! Again the elements of the benchmarking computation were not sufficient for a meaningful comparison and the $ 182 per unit amount is considerably lower than comparable unit costs in my database.
  • On buy here, pay here cars sold from $ 4,000 - $ 7,000 reconditioning costs were indicated to average only $ 231! This number again is considerably lower that my own data and is only $ 50 greater than those cars indicated in (2) above which are approximately $ 1,500 cheaper! This is again contradicted by my own database!

  • The aforementioned examples make these benchmarks useless without more knowledge of the accounting policies and practices used to compile them. As previously mentioned, all dealers do not compute reconditioning costs and gross profit in the same manner and this is true in numerous other areas. Such diversity of practices make it difficult to compare one dealers financial statements with benchmarks to evaluate performance.

The ability to make financial results consistent requires standard financial reporting formats similar to that used by new car franchise dealers. The use of a standard format would help buy here, pay here financial results be much more comparable and make benchmarking easier.

Unfortunately, standardizing financial reporting alone is not sufficient, unless consistent accounting standards and practices are also followed. For instance, if two dealers account for bad debt write-offs using different methods, their results will not be comparable even if their financial statement formats appear to be identical.

In June 2000, the AICPA published an "Audit Guide For Finance Companies". This publication applies to captive finance companies which are prevalent in the buy here, pay here industry. This audit guide contains sample financial statements and explains many of the more significant accounting policies and practices which should be used to prepare financial statements. This guide is an important step toward more consistency and dealers (and their accountants) are encouraged to follow these new rules and guidelines.

If financial reports aren't made consistent, lenders and other capital sources will not have relevant data to evaluate performance. This inability to compare dealer results may make raising capital more difficult for dealers with superior operations but conservative accounting practices. In addition, lenders should be encouraged to more fully understand the accounting policies and practices being used in the buy here, pay here industry and to monitor financial performance more closely after a loan is originated.

The National Association of Buy Here, Pay Here Dealers (NABD) working in conjunction with John McDonald of Management Performance Group is currently developing more consistent and meaningful benchmarks. Dealer members will be encouraged to follow consistent accounting standards and principles in preparing and submitting financial information for the NABD database. Results which do not comply with standard industry reporting practices and policies will not be included. These benchmarks will be ready later this year.

In conclusion, the buy here, pay here industry needs to strive for greater financial credibility before it can attract much needed additional capital. The responsibility for making this happen must be shared jointly by dealers, their accountants, and industry consultants!

Kenneth Shilson is Managing Director of his own CPA firm located in Houston, Texas which specializes in providing accounting, tax, audit, and consulting services to Used Car Dealers nationwide. He is also founder and Convention Chairman of the National Association of Buy Here, Pay Here Dealers (NABD) at www.bhphinfo.com. Questions can be directed to Mr. Shilson at: ken@kenshilson.com

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