Machiavelli quoted, “The one who adapts his policy to the times prospers, and likewise that the one whose policy clashes with the demands of the times does not.”
We have the privilege of observing and evaluating a variety of Buy Here Pay Here (BHPH) operations throughout the country. Some BHPH operators provide formalized written policies, which are extensively documented in certain areas (i.e., underwriting, collections, internal controls, etc.), while others do not. Generally, there appears to be a positive correlation of businesses that extensively formalize and document policies, procedures and processes with the success of the business. Therefore, do not take this subject lightly.
The evaluation and documentation process will require the BHPH operator to identify key business areas and processes and carefully orchestrate and evaluate each aspect of their business in order to insure that the policies and procedures are appropriate for the BHPH operations to achieve their goals for the business. Policy and procedures should be purpose-driven. Through clear and consistent policies and procedures, problem areas can be more easily identified through cause and effect relationships as opposed to haphazard processes, which may be difficult to evaluate. The development of policies and procedures is an evolving process, by continually seeking a “better way” until a “better way” is found.
We have noted internal controls and operating procedures which have been considered “lacking,” are often a result of BHPH operators not taking the time to either establish detailed documentation, revisit policies and procedures documented years ago and/or have not been kept up to date in a business that is continuously evolving. BHPH operators should take the time to review what formal processes, if any, are in place and analyze the differences of what should be happening versus what is happening. Any weaknesses and inconsistencies should come to the forefront.
BHPH operators will be able to take advantage of having written and well documented policies and procedures during training of new employees. This will reduce the risk that company policies and procedures will be followed and not evolve from other sources in ways not intended.
This process should include an evaluation of internal controls. Internal controls are important as they can minimize the risk of misappropriation of assets and other fraudulent activity. Small businesses often wrestle with segregation of duties issues. Does any one person have too much control over a process where it could be easy for them to manipulate the processes for their own gain? Is there extreme pressure from above to reach certain goals to the point employees would attempt to fraudulently alter their results and, if so, what controls are in place to prevent this? You want to be able to identify where the weaknesses are and put a control in place to try to reduce the chance of something as simple as preventable mistakes to fraud. A CPA experienced in the BHPH industry can assist you in evaluating and developing appropriate internal controls and other policies for your business.
Some key areas that buy-here pay-here dealers should consider in light of developing internal controls and policies include, but are not limited to:
- Cash receipts, credit card receipts, ACH/EFT receipts
- Cash disbursements, ACH/EFT and wire transfers
- Vendor invoicing management
- Vehicle purchasing/Inventory/Auction controls
- Vehicle wholesaling
- Parts procurement and reconditioning process management
- Gasoline policies
- Company credit cards
- Collector and Cashier policies
- Charge offs and repos policies
- Administering Bird Dog/Referral Fees
- Red Flags, Regulatory and Governmental agencies
- Financial reporting
- Payroll review, approval, disbursements
- Online access to accounts and computer systems
- Customer Account Edits and Management
In just about everything in life, communication is the key, so get management involved in providing guidance in policy development. They should be able to offer insights on what is happening on the floor, what is working and what isn’t, and how things can be improved. Since they are more likely to be affected by policy and procedural changes, input from the managers could prove significant and appreciated as the endgame should be beneficial to all involved. In a business with high turnover, it ensures that new employees are trained consistently and efficiently. The more thoroughly the policies and procedures are documented will reduce the inconsistencies which could be applied by employees.
Although much of the above may seem routine and mundane, keep in mind that in an ever increasing competitive environment, it is important for your operation to seek competitive advantages in every aspect of business, which would include development and documentation on policies, procedures and internal controls. Those who treat this seriously will make efforts to monitor and train their employees as well as revise policies as needed and to administer internal controls.
We all know that you cannot merely operate a BHPH operation from a written policy and procedure manual. However, through continued improvement, effectively correcting the problem areas, and reaching the point of operating a “well-oiled machine” status where only unusual issues would interrupt day to day, or even deal to deal, business. By having well documented internal controls and operational policies, in addition to impressing any consultants or auditors who might walk in the door one day, the peace of mind which goes along with knowing the dealer has organized procedures in place (and again, by doing so, saving time and money!), is worth the time and effort.