INDUSTRY NOTIFICATION - The Dixon Hughes Goodman Perspective On The General Motors NWC Requirements
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INDUSTRY NOTIFICATION
The Dixon Hughes Goodman Perspective
On The General Motors NWC Requirements
Spring 2013Dealer Services Industry Notification | Spring 2013
The Dixon Hughes Goodman Perspective On The
General Motors NWC Requirements
A Brief History
General Motors and other OEMs have, for many years, required their dealers to maintain a healthy Net
Working Capital (“NWC”) in each of their stores. That NWC Standard formula has been modified and
adjusted periodically, and the last rendering applied to all dealers came in 2009 and was based on a
dealership’s December 31, 2008 GM Dealer Operating Report.
On January 16, 2013, GM U.S. Sales Operations Vice President Kurt McNeil provided a brief overview,
and on January 28, 2013, General Manager Brian Small followed that with a more dealer specific missive,
accompanied by newly computed Working Capital Standards, for the recipient dealer. As an addendum to
Mr. Small’s letter, Attachment A provided a general overview of the a) “NWC Standard” calculation
components, b) the “Actual NWC” calculation components, and c) the “Long Term Debt: Net Worth”
calculation components.
Further, Attachment B provided each dealership with its prior and newly computed NWC Standard, Actual
NWC (and if the store was above or below the NWC required level), and Long Term Debt: Net Worth. The
data used to compute these current items was derived from each dealership’s September 30, 2012 GM
Dealer Operating Report. Attachment C provided a simple illustration of the impacted changes as they
will now appear on the Dealer Operating Report, and Attachment D had 15 items of Q&A related to the
three elements listed above.
What Should I Do in Response?
At a minimum, you need to do two things:
1. Run the computations of the NWC Standard, the Actual NWC, and the Long Term Debt: Net
Worth, and make sure that they are accurately calculated. Many of our GM clients have asked
their Zone Manager to furnish the detail supporting the NWC Standard computation, and what
has been delivered (for both the December, 2008 and September, 2012 computations) in most
cases is one number from each of the six elements (see below) of the calculation. NOTE: in
many of the computations we have checked, we have found a number of errors and
inconsistencies (although those errors can be both in the dealership’s favor or work
against it). If you find that changes are required, you need to contact your Zone Manager and get
those corrected. Many industry attorneys have conveyed to us that by a dealer failing to act in
response to this Attachment B set of computations, that inaction could be viewed as implying
agreement with them. Make sure that these computations are right! If you would like our help in
checking these computations or discussing them, please contact: Robert Davis at (901) 684-
5646 or at robert.davis@dhgllp.com.
2. Use this as a very good opportunity to review your GM Dealer Operating Report and take
advantage of understanding various options you have in how you present your financial
information and steps that can be taken regarding various corporate finance options available to
2013 Dixon Hughes Goodman LLP | dhgllp.com/dsgDealer Services Industry Notification | Spring 2013
you. Consult your DHG Dealer Services Group professional directly to help you or contact us at
877.DLR.CPAs (877.357.2727), or send us an email at dsg@dhgllp.com.
How Does GM Compute the NWC Standard?
There are Six Elements used by GM in computing your NWC Standard. Five of the six elements are
derived solely with data found in your income statement. While you are provided general language about
this in the Attachment A provided to you, it falls short of telling you precisely what you need to know in
computing the Standard. We have communicated with GM officials who understand the calculations, and
DHG has a spreadsheet computation that includes all components considered by GM. A discussion of
the six elements and a few comments on each follows:
Item A – Expenses
Item B – Customer Receivables
Item C – Used Cars and Trucks
Item D – Parts
Item E – Factory Receivables
Item F – Warranty Claims
Item A - Expenses
This item, on the surface, appears to be fairly straight-forward. Go to page 2 of your Dealer Operating
Report (“DOR”), look on Line 57, and there is the number that GM may provide to you if you ask for the
detail used in their calculation (see above). What they do not tell you (at least through the responses we
have seen provided by GM to their Zone Managers when you ask for their detail), is that they will reduce
that Line 57 number (and we concur with this) by the Amortization of your Leasehold Improvements, as
well as the Depreciation Expenses for both your Buildings and your Equipment. In addition, please see
the discussion below on The Annualization Factor.
Item B - Customer Receivables
The Attachment A description of this by GM is “Average Month’s service, body & parts customer sales
less cash sales”. That description is simply not correct. To begin with, the calculation used by GM has
nothing to do with Sales; it has to do with Cost of Sales. The Balance Sheet equivalent here is that you
are covering one month of your normal (average) Customer Receivables. To determine this requires a
study of page 6 on your DOR. What is included and what is not included was our first major concern. As
described, the first step of this Item B calculation involves looking at the Cost of Sales for your
mechanical, body shop, and parts elements; and internal items are appropriately excluded. Warranty
items are also excluded because they are considered in the computation of Item F.
One item that deserves special attention is the exclusion of the Cost of Sales generated from Cash Sales
(since they appropriately do not generate customer receivables, and accordingly would not warrant any
working capital) on page 7 of your DOR. Since only the Sales number is provided on page 7, you have to
derive an appropriate Cost of Sales amount; and you arrive at that by applying the same gross profit
percentage to Cash Sales as is computed on the aggregated Service, Body Shop, and Parts sales
included in your first step of this Item B calculation. Once those Cost of Sales for Cash Sales are
computed, they are then subtracted from the total Cost of Sales. That resultant number is the number that
2013 Dixon Hughes Goodman LLP | dhgllp.com/dsgDealer Services Industry Notification | Spring 2013
your Zone Manager may present to you when you ask for their detail. Our experience has been that for
the December, 2008 calculations, we have (for the most part) been “dead on” with the GM calculations.
However, we have found several differences in our calculations with those provided by GM when it comes
to the September, 2012 numbers. Those need to be researched and resolved, and another element of
those differences involves the discussion below on The Annualization Factor.
Item C - Used Cars and Trucks
The Attachment A description by GM (“Average month’s used vehicle retail sales at cost less an
allowance for up to 30% of floor plan”) is vague and complex. The calculation used by GM is for Cost of
Sales, period. To determine that is simple enough by going to Line 7 on page 6 of the DOR and deriving
the Cost of Sales for retail used vehicle sales (NOTE: wholesale cost of sales are appropriately
excluded). That amount is then reduced by the lesser of your Notes Payable - Used Vehicles on Line 15
of page 1 or 30% of the amount computed in the first part of this Item C for average monthly used vehicle
retail Cost of Sales. The number provided to you by your Zone Manager if you request the detail will most
likely be the annualized number for the Cost of Sales not reduced by any flooring allowance (see the
discussion below on The Annualization Factor).
Item D - Parts
The Attachment A description used by GM (“2.4 month’s supply of Parts & Accessories inventory based
on average month sales and costs”) is a little more accurate than their Item B and C descriptions,
although the calculation has nothing to do with Sales. As with all of these, Cost of Sales is your concern,
and the number used for this calculation is easily found in your DOR on Line 61 of page 6. The number
provided to you by your Zone Manager when the detail is requested is simply this Cost of Sales number
taken off of Line 61 in most cases. Ideally, you determine one month’s Cost of Sales and multiply by the
2.4 factor to determine that element of the NWC Standard. As with the other components of this
computation, we have found that our calculations have been “spot on” with the December, 2008 GM
calculations, but we have seen varied results in many cases when computing the September, 2012
amounts.
Item E - Factory Receivables
This Attachment A description is confusing. GM communicates that this element is computed as the
“Average Factory Receivables based on 12 months of Balance Sheet values”. In reality, the computation
has nothing to do with the Balance Sheet per se, but rather the numbers are derived from the new vehicle
retail sales as they appear on page 5 of your DOR. In addition, the coverage expected is not mentioned,
but it is actually computed to be 3 months’ coverage of the factory holdback receivables. Hence, fleet and
internal sales are appropriately excluded. To arrive at the ultimate NWC element required to be covered,
the appropriate dealer holdback (at 3%) is applied to the total car and truck retail sales and then
computed for the requisite 3-month period. The other common factory receivables (e.g., EBE and SFE)
are not considered in this computation.
The numbers provided by GM to the Zone Manager when you request the detail can vary. We have seen
both a number which is the computed NWC Standard calculated amount, and we have seen a
presentation as “x units at $y/unit”. Regardless of how the detail is furnished, it is worthwhile to check
those for accuracy. Yet again, we have been very much in line with GM when comparing the December,
2008 calculations, but we have also had varied results when computing the September, 2012 amounts.
2013 Dixon Hughes Goodman LLP | dhgllp.com/dsgDealer Services Industry Notification | Spring 2013
The number provided by your Zone Manager if you request the detail will be this annualized number in
most cases (see the discussion below on The Annualization Factor).
Item F - Warranty Claims
Similar to the Factory Receivables description in GM’s Attachment A, the description as “Average Month
of Warranty Receivables” is confusing and incorrect. The implication is that the amount is derived from an
analysis of the dealership’s Balance Sheet for Account 263. However, the data required to make the
calculation is obtained from page 6 of the DOR for the mechanical, body shop, and parts Cost of Sales. The
number provided by your Zone Manager when detail is requested is the annualized total Cost of Sales for all
warranty labor and parts in most cases (see the discussion below on The Annualization Factor).
What about the Annualization Factor?
When GM computed the December, 2008 NWC Standard, they were using the December 31st Dealer
Operating Report. Since most dealerships report on a calendar year, the annualization computation was
easily made by dividing the total computed by 12. However, for this new 2013 NWC Standard, GM
selected the September 30, 2012 DOR, and what we have discovered is that there have been varied
applications of the annualization factor for various dealer clients. In essence, it is fair to assume that since
the 9-month period financial statement (September) was selected, the totals used for Cost of Sales would
be multiplied by 12/9 to determine an anticipated annual total. Then that total could be applied to reflect
the applicable one-month or three-month coverage desired in the NWC computation. What we have
discovered, though, is that sometimes the September 30, 2012 total has been taken by GM as if it were
the annual total, and that reduced amount has been used to compute the applicable one-month and
three-month coverage. If those reduced annualized amounts are used, this results in a lower NWC
Standard that actually favors the dealership. Hence, you need to be very clear in understanding all
elements of your NWC Standard computation before you begin communicating with your Zone Manager
on other issues.
How Does GM Compute the Actual NWC?
The GM Attachment A description for the Actual Net Working Capital is understandable and easily
verified. The Actual NWC for your dealership is equal to Current Assets (page 1, Line 44L) less Current
Liabilities (page 1, Line 31R), and that amount is increased by your total LIFO reserves (page 1, Line
35R). This number is compared with the NWC Standard explained above, and the dealership is
determined to be in compliance with the GM required NWC Standard if the Actual NWC exceeds the
Standard.
How Does GM Compute my Long Term Debt: Net Worth?
As with the Actual NWC explanation, GM does a nice job of describing in their Attachment A how their
newly reported “Leverage: LT Debt/Net Worth” is computed. Everything you need to verify the GM
calculation is contained on the right side of page 1 of your DOR. There are four components of the LT
Debt amount used, and there are two components of the Net Worth amount used:
Net Long-Term Debt (“LTD”) = Reserves & Deferrals (A/C 332; Line 32) + Notes Payable –
Capital Loans (A/C 334, Line 34) + Other Notes & Contracts (A/C 336, Line 35) + Notes Payable
– Affiliated Companies (A/C 338, Line 40).
2013 Dixon Hughes Goodman LLP | dhgllp.com/dsgDealer Services Industry Notification | Spring 2013
o NOTE: LTD does not include Deferred Taxes (A/C 333; Line 36), Other Notes – Owners
(A/C 337; Line 38), and Mortgages Payable & Facility Related Loans (A/C 335; Line 40)
Net Worth (“NW”) = Net Worth (Line 64) + Other Notes – Owners (A/C 337; Line 38)
The Leverage Standard required by GM is that your Long-Term Debt (as defined above) is less than the
Net Worth (as defined above). Hence, the LTD/NW computed ratio is required to be less than 1.0:1.
What Are Some Things I Should Be Looking At and What Can I Do to Help My Situation?
1. Double check your account groupings on your financial statement to be sure that the account
balances are properly linked to the correct financial statement line. As indicated, GM is computing
your NWC Standard by taking numbers directly from your September 30, 2012 Dealer Operation
Report. Hence, resolving an issue might be as simple as correcting an accounts grouping link.
2. Make sure that you are properly classifying your debt on your factory statement. Place facility
debt, owner debt, and affiliate debt in their proper locations.
3. Make sure that short-term/long-term classifications are correct according to the terms of the
applicable debt instruments. Consider renegotiating terms with your lenders to accomplish a more
favorable working capital classification.
4. Determine if you are carrying reserves on your books in places that would affect these
computations either favorably or unfavorably. For example, some dealers carry inventory write-
down reserves in Account 332 rather than as a reduction of the inventory balance on the financial
statement. This example hurts the Debt to Net Worth computation and helps raise the
computation of Actual NWC.
5. Similarly, determine how you are handling any inventory packs and review how this is impacting
your NWC requirement.
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6. Check to see if you are deferring operating income or expenses and writing them off in the 13
period. Depending on how those are accounted for on the books of the dealership, these delayed
adjustments may be distorting the NWC Standard and Actual NWC in the computation.
7. Make very sure that you are properly reporting cash sales on page 7 of the monthly financial
statement. In addition, make sure that credit card sales are treated as cash sales if you are
receiving immediate credit for them from your financial institution. That information is a very
important component used in the NWC computation.
8. Be sure to remember that LIFO reserves, if applicable, reduce Net Worth but not NWC if they are
classified properly on the DOR.
9. Carefully review your Prepaid Expenses items. Many dealers use this account to inappropriately
defer expenses on the DOR.
10. Review all related party (ex. owners and officers) notes or open accounts and make sure that
they are properly recorded in accordance with the GM Standard Accounting Manual. This can be
accessed online at http://gm.acctmanual.com. Review the terms of each of these items and
revise as needed to properly state both the NWC and the LTD/NW computations. Owner notes
properly classified in A/C 337 have a dramatic impact on the LTD/NW computations, and if the
2013 Dixon Hughes Goodman LLP | dhgllp.com/dsgDealer Services Industry Notification | Spring 2013
debt is currently classified as a Current Liability (for example, it is financed as a demand note to
the owner), it will also have a detrimental impact on the Actual NWC computation.
11. Similarly, review how your dealership is recording any mortgages and facility-related loans. A
facility-related loan currently recorded in A/C 334 or 336 has a far different impact on your
LTD/NW ratio than if it is recorded in A/C 335.
12. Review how you are flooring your vehicles, especially how you are classifying your debt related to
used vehicles. Remember that the Used Cars and Trucks component of the NWC Standard
computation may be reduced by up to 30% of the Floor Plan – Used Vehicles recorded in
Account 311 and reported on page 1, Line 15 of your Dealer Operating Report. Be sure to
understand how this component of the NWC Standard is computed, and respond accordingly.
13. Make a careful review of what you are including or excluding in your departmental expenses and
what is ultimately being included in Total Expenses on page 2, Line 57 of your DOR. Give
consideration to proper reporting between Total Expenses and Net Additions & Deductions and
Owner/Employee Bonuses.
14. Stay on the alert for any new policy bulletins that should summarize these and other policy
changes that General Motors is implementing in 2013.
Dixon Hughes Goodman Contact
Robert Davis, Partner, Dealer Services Group
Robert Davis brings over 25 years of public accounting experience to his
clients. He also gained valuable experience in the car business by spending
countless hours in his father’s Lincoln-Mercury dealership when he was a child.
Currently, Robert serves dealership clients in the areas of accounting, tax, and
management advisory services. In addition, he is heavily involved in buy/sell
agreements and litigation support services. Dealers around the country
recognize Robert for his operational knowledge of automobile dealerships and
the impact his Strategic Assessments have had on dealerships.
Contact Robert: 901.684.5646 | robert.davis@dhgllp.com
2013 Dixon Hughes Goodman LLP | dhgllp.com/dsgDealer Services Industry Notification | Spring 2013
Tim York, Partner-in-Charge, Dealer Services Group
Tim is the Partner-in-Charge of the firm’s Dealer Services Group and works daily
to strengthen its ties to dealers and the dealership industry. Since 1993, he has
focused extensively in the dealership industry and works with large dealership
groups primarily on assurance and valuation matters. He also has worked in the
capital investment areas. Tim has performed valuations and valuation consulting
related to mergers and acquisitions, estate and gift taxes, litigation, and other
matters. Tim has also provided expert testimony, worked valuation matters in
mediation and arbitration, and has served as the special master on court
appointed assignments.
Contact Tim: 205.212.5301 | tim.york@dhgllp.com
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