Parts Department Accounting
It's an issue that plagues the majority of the industry, long-time industry trainer Dave Piecuch says, and every time parts department accounting is neglected a dealerships puts its second-highest grossing business asset at risk.
“When you get more transactions in a parts department in a single day than there is in a dealership in a whole month, there’s a lot that can go wrong very quickly,” he says. “I can summarize it in one question: If you owned a dealership, would you want a parts counter to be your accountant? Most people would say no.”
Lack of accounting training leads to frozen assets, decreased service productivity and inventory discrepancies. Piecuch has trained parts and service departments since 1996 in addition to serving as a fixed operations director and eventually forming Automotive Consultants Group Inc., a parts consulting company. Piecuch discusses the keys to properly managing the complicated financial books for a dealership parts department.
First, every day, they need to reconcile all purchases and receipts on a daily basis with the office manager. If I start buying parts from all these different parts stores and dealerships and I just throw them in a basket, you’ve opened yourself up to a big problem. It’s incorrect inventory variances between accounting and controlled inventory. A lot of times, it can mean a difference between a dealership having a blue sky in its parts department and not. So, if my accounting shows $100,000 but I actually have $150,000, then I have $50,000 blue sky of added worth to my parts department.
They have to reconcile all receipts, purchases, and all the different parts on a daily basis. I can take reconciliation in three different ways: First, on a daily basis on all the transactions on parts, sales and purchases to make sure the balance is there. At the end of the month, they should look at the parts reconciliation report generated by their IMS, get their inventories and match it to the financial inventory to see giant discrepancies. That way you won't have those big surprises at the end of the year. Then, at the end of the year, the parts inventory has to match the accounting inventory.
Second, the office manager must have an accounts payable or receivable person that directly communicates with the parts department and demands those slips every day. They have to make the proper debits and credits, and make sure what they actually paid for is how it was billed out on a repair order. And if there were positive or negative adjustments, discounts, allowances, etc., they have to be accounted for on the financial statements.
An effective relationship between the office and parts managers starts with the two having an equal amount of training in accounting. Obviously the office manager is going to have accounting training. The parts manager doesn’t know any of that. That’s where the disconnect happens. A lot of times, the parts manager and the office manager don’t know each other. That’s not the relationship they should have; they have to work directly with each other.
Three, the parts manager should know why he’s doing this and know basic standard accounting, and the office manager should understand the position of parts managers. The National Automobile Dealers Association has put together a class that teaches about debits and credits, chart of accounts, etc. But conversely, office managers need to be able to identify, recognize and fix discrepancies or red flags as they come up.
If you think of parts inventory as a house with many different rooms—called sources—each room will have a different level of activity. Each inventory has anywhere from 8–10 sources where the parts manager is able to manage each part activity of one part differently than another. If I have a part that sells only 12 times per year, I only need a 30-day supply of that. If I have a part that sells 1,000 times per year, I need a two- or three-day supply.
Within this average inventory, the parts manager has to rely on his DMS and IMS to control the inventory. No one can watch 5,000–10,000 parts. The setups have to be correct in the systems to properly phase in a part when it’s due to be a stock item and when to phase it out so it doesn’t sit there too long. And be profitable on top of that, keep that inventory consistent by doing perpetual inventory, making sure the count is right, making sure the asset is moving. When they go count that inventory, if you get $200,000 in inventory and $50,000 is junk, that’s $50,000 the dealer has in frozen assets.