Dealership Checklist: Navigating the COVID-19 Crisis

  • 4/7/2020

Where do you start in understanding how your dealership could be impacted by the coronavirus pandemic? What steps can you take to adjust to this ever-changing situation? Use this checklist to get started.

Key insights

  • Like many organizations, dealerships are reviewing their business strategy in light of the coronavirus pandemic.
  • Dealerships should review key aspects of their business, including operations, accounting, and tax impact.
  • This checklist covers key areas that should be evaluated and possibly addressed. Review additional information in our COVID-19 resource center.

As the COVID-19 health and economic crisis continues, many dealers are trying to understand the latest changes impacting their organizations. This checklist focuses on key areas to consider as you navigate operational and cash flow issues, bank financing questions, and tax law changes.

Evaluate operational and cash flow matters

Should you keep your dealership open? Will you be allowed to keep it open? As long as your dealership operations are deemed an “essential service” by the state or federal government, you can continue operating. The parts and service department has consistently been deemed essential; however, there is still uncertainty regarding the sales department. Most dealerships are operating their parts and service department along with a limited sales department.

Consider these key areas when looking at your operations

  1. Determine how to support and manage your employees, including potential shifts:
    • Expand safety precautions and protections for your employees
    • Temporarily shift employees to a remote work arrangement when possible
    • Reduce store hours
    • Implement a hiring freeze
    • Eliminate overtime
    • Identify nonessential employees
    • Plan for possible furloughs or wage reductions
      • Consider waiting to see how the emergency government lending program unfolds
    • Evaluate your service department, and consider separating employees into two groups to minimize the impact of a sick employee and to continue offering full benefits with no layoffs
      • Example: blue and red teams would each work 32 hours per week, with the blue team working Monday, Tuesday, and Wednesday and the red team working Thursday, Friday, and Saturday
    • Consider recruiting and hiring technicians now
    • Provide cash flow to your employees through a bonus or loan prior to a forced layoff
  2. Invest in your online sales channel. Consider offering online sales with touchless or remote sales and service delivery, including people, processes, and online spending.
  3. Reduce your overall advertising spending.
  4. Limit vendor interactions with your dealership to minimize the spread of the coronavirus.
  5. Eliminate discretionary expenses (i.e., travel, meals and entertainment, outside services, loaner vehicles, etc.).
  6. Manage inventory levels by reducing inventory for both new and used vehicles. Maintain adequate parts inventories, as there could be shortages in the near future.
  7. Review your cash flow.
    • Accelerate collections of receivable balances — vehicle, contracts in transit, factory, and parts and service
    • Stretch payment terms on outstanding payable balances
    • Floorplan all eligible new and used vehicles to free up cash
    • Reduce 2020 capital investments in furniture, equipment, and facilities
    • Evaluate the need for a working capital loan to finance operations
    • Review excess cash flow available in reinsurance companies to loan to the dealership

Review bank financing matters

The coronavirus crisis is different from the 2008 financial crisis, where we faced a lack of liquidity in the financial markets. In our current crisis, most dealership banking partners are well capitalized and, as such, are able to work aggressively with dealers to provide financing and have the flexibility to assist with short-term cash flow needs. Many dealers are in a strong financial position and will be able to weather this crisis, which could be a fairly short-term event, and see a quick recovery in the second half of 2020.

Consider which bank financing issues to review

  1. Review your dealership financing and alternatives with your bank for the following types of debt:
    • Term debt — Many banks are offering interest-only payments for a period of time. Look at refinancing now with fixed rates declining.
    • Floorplan — Interest rates dropped significantly in 2020, and many banks are offering curtailment waivers. Evaluate placing a mandatory hold on vehicle drafts from the manufacturers.
    • Mortgages — Many banks are offering interest-only payments for a period of time. Look at refinancing now with fixed rates declining.
  2. Consider implementing a debt swap to hedge against future interest rate increases.
  3. Watch for aggressive customer incentives to grow in the second half of 2020, which will aid the recovery. In many cases, 0% interest rates are returning and deferred payment terms or payment holidays are being rolled out.
  4. Determine whether the Small Business Administration (SBA) emergency loan program, which provides short-term liquidity, is right for your dealership.
    • An SBA Economic Injury Disaster Loan provides up to $2 million to help business with fewer than 500 employees pay fixed debts, payroll, accounts payable, and other bills that can’t be paid due to the loss of revenue caused by a declared disaster. The loans cannot be used to cover lost profits. Most states are now included in this disaster declaration and eligible.
    • Interest rates are at 3.75%;
    • The maximum loan term is 30 years with a one-year deferment on payments with interest accruing immediately.
  5. Stay up to date on the significant new government financing programs in the works in Congress.

Tax law changes

There are a number of tax law changes that have been issued. Be aware of some of these important changes:

  • The 2019 federal income tax returns and payment deadline has been extended from April 15, 2020, to July 15, 2020. This change does not apply to state tax or informational returns deadlines.
    • You do not need to file a federal extension form by or on April 15, 2020 to receive the extension to July 15, 2020.
  • The due date for 2020 first quarter federal estimates due on April 15, 2020, has been extended to July 15, 2020.
  • Please be aware that at this time, many states have not issued guidance on due date changes for 2019 tax returns or first quarter estimates.

Regulatory updates

The Families First Coronavirus Response Act includes key provisions such as:

  • Establish a federal emergency paid leave benefits program
  • Expand unemployment benefits and provide grants to states for processing and paying claims
  • Require employers to provide paid sick leave to employees
  • Provide coronavirus diagnostic testing at no cost to consumers
  • Enhance food assistance
  • Increase Medicaid funding

Read our article, “FAQs Regarding COVID-19 and Human Capital, Tax Impact,” for additional information.

How we can help

Consider evaluating and implementing some of these operational changes in your dealership to navigate the current COVID-19 health and economic crisis. We will get through it and be stronger as we move into the future. At CLA, our dealership professionals are here to help you and can provide guidance for your operational, financing, or tax questions.

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