Protect your Automotive Dealership Profit with Purchase Orders

2022 is likely to be the most profitable year automotive dealerships have ever recorded. So said J.D. Power in a recent article in Automotive News . The supply of cars is very low right now, and has been since the pandemic started. There is a lot of pent up demand, so dealerships can set--and get--higher prices. It’s a year they can sell on gross profit, rather than on volume.

Which makes it a perfect year for them to adopt a purchase order system.

Wait, what?

I know, asking people to do purchase orders is an extra step that’s “not worth the effort”. I grew up in dealerships and have been a purchase order advocate since my first stint in the back office of my father’s dealership. I’m familiar with that argument.

Hear me out

We all know that dealerships need to digitize their processes, and a purchase order process ties into other digital systems, such as your DMS, procurement system, and payment automation system to help you achieve paperless processing.

Large, publicly traded dealer groups are already well along the road to digitizing POs as part of their overall digital transformation. They have to answer to shareholders and a board of directors so they have to control their spending, and they have to follow legal guidelines. But shareholders or no, this is really something all dealership groups should aspire to.

But why now? Why not just make hay while the sun shines and save back-office cost cutting measures for leaner years?

Obviously record profit years don’t come around very often. It’s prudent to take some of that profit and reinvest it in protecting current and future profits. Because that’s what POs are: an investment in protecting profits.

Why purchase orders?

What many people don’t realize is that a purchase order is a legally binding contract between buyer and vendor.

When you agree to buy anything from a vendor--from a car to an air filter--you agree to a certain price and certain terms, both of which affect your profit on resale. That kind of binding agreement is pretty important right now with all the instability in the supply chain. If you don’t have it, it's pretty much a free-for-all.

The vendor could say, "Yeah, we'll sell that air filter to you for $200." And next thing you know, you get an invoice for $225. That cuts into your profit. You get on the phone to the vendor and they say, "Oh, well, our costs went up." Without a purchase order, it's your word against their word, and everybody loses. 

Terms also affect your cash flow. If you say to the vendor, "We’ll buy the air filter for $225, but we're not going to pay you for 45 days," and you memorialize that in a PO, then everyone’s expectation has been set and you can manage your cash flow more effectively.

Purchase orders help reduce both external and internal fraud risk

Accounts payable teams need to be on high alert for fraudulent invoices from cybercriminals who’ve collected data that allows them to run some pretty convincing scams.

A purchase order number on a vendor invoice is a good indication that the purchase was indeed authorized, and the invoice is legitimate. It’s easy to confirm that by matching the two up in your PO system. And if there are any questions, there's an electronic audit trail that makes it easy to see who placed the order.

Then there’s internal fraud--people setting up fictitious vendors, invoicing the dealership and then making the payments to their own bank accounts or those of a friend or family member.

That’s always a risk when you have people involved in the payment process who are struggling financially. The risk is perhaps a little higher in 2022 because when people are aware that dealers are having record high profits, they want to participate in those profits, one way or another.

What’s holding dealerships back?

In my experience, organizations don’t implement a purchase order system for two reasons.

First, there’s the idea that purchase orders take more time. Dealership back offices tend to be short staffed, and the current labor shortage isn’t helping. Anything that sounds like more work for people that are already wearing many hats is a non-starter.  If you’ve got people walking around the dealership, looking for people to sign checks and approve invoices, having someone do a purchase order isn't really taking up any more time than you're already spending on that.

Then there’s the persistent belief that requiring live signatures on every check is an effective way to control expenses and prevent fraud. It isn’t. For one thing, it’s a rare dealership that is using only checks. Most dealerships make some card and ACH payments and those don’t require signatures. In my experience, there are many expenses being paid by an automated system which makes automatic deductions from your checking account, or paid as a recurring payment on a corporate credit card. Unless you are approving every credit card statement, reviewing your bank statement every month, and questioning every ACH payment, you are not as in control of your expenses as you may believe

An automated PO system is necessary to move to a more modern way of doing business. Combine that with a payment automation system, and you can complete the whole PO-to-pay process in about a quarter of the time that it’s taking now, and with greater security and control.

With a robust PO system in place, you’ll protect your profits in this record year, and beyond.