It's 9 AM. Do You Know What Your Net Cash Is?

Net cash balance is one of the best indicators of how healthy your store is. If your net cash balance is adequate to good, you are in a position to be proactive and take advantage of opportunities. For example, with plenty of cash on hand you can go to auction to buy cars and you don't have to worry about making payroll.  


On the other hand, if your net cash balance is below adequate to poor, your situation becomes precarious. You get thrown into reactive mode and you're spending time and resources chasing cash. To raise more cash you may decide to have a fire sale to get rid of some of your used car inventory. Unfortunately if you resort to this type of tactic, the end result is that you raise your net cash balance, but perhaps at a loss if you've had to sell inventory below cost. 


So how do you know what your net cash should be? An optimal net cash balance is equivalent to one month's operating expenses. So if it costs roughly $400,000 a month to run your store, your running net cash balance for the last 30 days should average around $400,000. Sounds simple, right? Not necessarily. 


Net cash can be difficult to calculate because there are so many variables. The hard and fast formula I recommend using is the following: 


[Cash in bank] - [checks outstanding] - [flooring due] + [Contracts In Transit] = Net Cash 


Of course there are other factors such as income tax due, sales tax due, accounts receivable due back to your store, etc. So the formula is not in-depth or to the penny at any given time, but overall it gives you a good idea of where you stand.  


Although net cash will be up or down on any given day, if you track it daily in a report or on a chart, you'll be able to identify negative trends occurring in as little as a week. If your net cash balance drops to less than 25 percent of your monthly operating costs, or about $100,000 in the above scenario, you'll need to take some corrective action pretty quick. 


Let's say you notice a trend downwards. What can you do? The first place to drill down is the CIT. Hopefully you're looking at this metric every day anyway. Is there anything that's causing your CIT to be lower than it should be? Check to see if any of your salespeople are delivering cars without approved contracts, or if any of your F&I managers haven't been turning deals into accounting. 


If your net cash is trending downwards, another place to look is flooring due. How much inventory do you have? Do you really need a six-month supply of new or 75-day supply of used? If you catch this trend early enough you won't be forced to have a fire sale; you can simply stop ordering new inventory for a few weeks or months until your net cash balance rises back to where it should be. 


Last but not least, drill down to your checks outstanding. Are you tracking your expenses to see if there are any negative trends occurring? Perhaps you have a couple vendors where the inevitable "expense creep" is happening. Perhaps there have been a couple one-time, large expenses that affected your net cash but since they were just one-time, you don't really have anything to worry about.  


Checking net cash balance daily gives you a good idea of how healthy your bottom line is at any given time. It's an important metric to track because if you're constantly chasing cash, you're not really running your store--your store is running you! 

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