Understanding Cash Flow Reports: A Crucial Tool for CFOs and Dealer Principals

Written by Ivy L.

In the automobile industry, particularly for dealership operations, managing finances effectively is paramount to ensuring long-term success. One of the key financial tools that helps CFOs and dealer principals stay on top of their company’s financial health is the cash flow report. While it may seem like just another report, its value lies in the insights it provides into a dealership's financial operations, helping leaders make informed decisions.

What is a Cash Flow Report?

Cash is the lifeblood of any business. A cash flow report tracks the movement of cash in and out of the business on a regular basis (monthly, quarter or annually). It details how cash is generated and how it is used across various areas of operations. This report is typically divided into three key sections:

1. Operating Cash Flow: involves the day-to-day operations of the dealership, includes cash inflows from car sales, parts and service revenue, and other income sources as well as cash outflows for expenses like rent, payroll and utilities.
2. Investing Cash Flow: refers to the buying and selling of assets, such as purchasing real estate, equipment or facility upgrades.
3. Financing Cash Flow: involves any borrowing or lending activities your dealership engages in. This could include loans taken out to purchase the dealership, to finance working capital or leasing agreement with financial institution or manufacture. It is essential to track closely on financing cash flow to ensure you manage debt responsibly.

Why is a Cash Flow Report Important for Dealerships?

1. Ensures Liquidity

In the fast-paced world of automobile sales, dealerships must have enough liquid cash to meet their short-term obligations. A cash flow report allows CFOs and dealer principals to track whether the business has sufficient cash on hand to cover operational expenses, including payroll, supplier payments, and overhead costs.

2. Helps in Making Informed Decisions

The cash flow report provides a clear view of where cash is moving within the business. By pinpointing areas of consistent negative cash flow, dealer can identify operational inefficiencies, such as excessive inventory cost, high operating expenses, or issues in account receivable collections. Conversely, areas of positive cash flows indicate strength, such as efficient sales strategy, strong after-sale services, which could be further invested in or replicated in other departments.

3. Helps with Securing Financing

If a dealership is looking to expand, add a new showroom, or invest in new technology, a positive cash flow report can be critical when seeking financing from banks or investors. It demonstrates the dealership’s ability to maintain a consistent cash inflow and thus can fulfill debt obligation timely.

4. Assists in Budgeting and Forecasting

Review your cash flow forecast regularly to identify any potential gaps between your projected income and expenses vs cash collected eventually. If you anticipate a cash shortage, consider implementing measures such as adjusting your inventory levels, renegotiating payment terms with suppliers, or exploring financing options. By taking proactive measures, you can bridge any cash flow gaps and ensure a healthy financial position.

Cash Flow Statement vs. Income Statement vs. Balance Sheet

While the cash flow statement is crucial, it's important to understand the relationship among cash flow statement and income statement and balance sheet.

• Cash Flow Statement: The cash flow statement measures the performance of a company over a specific period. One key advantage of the cash flow statement is that it isn't easily manipulated by the timing of non-cash transactions. It gives a clearer picture of the company's actual cash inflows and outflows, providing a true measure of liquidity. Cash flow statement only records transactions where cash is exchanged.
• Income Statement: The income statement measures a company’s financial performance over a period, detailing revenues, expenses, and net income. Income statement reflects earnings and expenses on an accrual basis, meaning it includes revenues and expenses when they incurred, regardless of cash settlement.
• Balance Sheet: The balance sheet provides a snapshot of the company’s assets, liabilities, and shareholders' equity at a specific point in time.

When accrued revenues or expenses settled with cash, they will impact account receivables/ account payables balance change from prior period on the Balance Sheet instead of Income Statement (as it was already recorded previously). Cash flow report will reflect the actual cash movement in the current period.

Investment and Financing activities primarily are reflective on Balance Sheet rather than Income Statement because they involve cash inflows and outflows related to long-term assets or liabilities, and equity. Cash flow report will capture cash movement due to investing and financing activities.

Therefore, cash flow is not the same as net income—a key point for dealership owners and CFOs to keep in mind when managing their financial strategies.

How to Use a Cash Flow Report Effectively

To get the most out of your cash flow report, consider the following best practices:

• Monitor regularly: Monthly reviews will allow you to spot trends, such as seasonal changes in cash flow, that can help you prepare for future financial needs.
• Compare with other financial statements: The cash flow report should be analyzed alongside the income statement and balance sheet to give a complete picture of the dealership’s financial health.
• Plan for the future: Use cash flow data to make proactive decisions. For example, if you see a period where cash is expected to be tight, you can arrange financing in advance or reduce discretionary spending.

Conclusion

For any dealership, understanding cash flow is essential to maintaining financial health and operational success. A well-prepared cash flow report not only ensures the business can meet its short-term obligations but also helps dealer principals and CFOs make strategic decisions about future investments, growth, and risk management. Regularly tracking and analyzing cash flow is one of the most reliable ways to steer a dealership toward long-term profitability.

By mastering cash flow management and understanding how it interrelates with other financial statements like the income statement and balance sheet, automotive dealers can navigate the financial complexities of their business and stay competitive in a dynamic industry.