Sales Forecasting and Cash Budgeting for Automotive Dealerships

By Ahadiat, Nasrollah | The Journal of Business Forecasting Methods & Systems, Fall 1992 | Go to article overview

Sales Forecasting and Cash Budgeting for Automotive Dealerships


Ahadiat, Nasrollah, The Journal of Business Forecasting Methods & Systems


Cash flow forecasting and cash budgeting have gained a great deal of popularity among entrepreneurs in recent years. Forecasting is now used by many managers as a basis for preparation of their plans including budgeting. While forecasts are hardly accurate, the inaccuracy in forecasts should not be used as an excuse for not realizing management's plans.

In the retail automotive sector, poor cash management has been blamed as a major factor in the demise of many dealerships. In the first part of the 1980's alone, over 4,276 auto dealerships went out of business, many of the remaining saw profits skid to a near break-even level. Despite significant increases in dealership revenue, dealers are experiencing sizable declines in their profit margins. While revenues increased over the last decade, primarily from rising prices, dealership profits dropped considerably (an average dealership revenues increased from $10 million in 1985 to over $12 million in 1989, while profits dropped from $224 thousands to $123 thousands during the same period). Such anomalous behavior of the operating results is indeed symptomatic of automotive dealerships' serious managerial and financial problems.

A major reason for this phenomenon, recognized by the dealers who participated in a recent survey, was poor cash budgeting and forecasting practices. Many dealers expressed great concerns about their inability to monitor their cash management and cash flow positions. Also, they showed a strong interest in using budgeting techniques for planning and controlling dealerships' cash operations.

The primary purpose of this study is to demonstrate a sales forecasting and cash budgeting model for automobile dealerships which can be easily used with small scale microcomputers. For automobile dealerships "business as usual" is no longer satisfactory. Staying one step ahead of competitors, or at the very least moving along, requires appropriate planning and forecasting of future conditions. The proposed budgeting technique, although widely used by many large businesses, has not yet been fully utilized in the retail automotive sector. Dealers by using this computerized budgeting can better plan their cash disbursements including capital expansions, marketing activities and other operating expenses, as well as finding answers to their "what if" questions.

An additional advantage of this budgeting tool is that it allows better coordination of dealership operations including new and used cars, parts and service. With this computerized system, cash balances, which are influenced not only by car sales but also by other aspects of dealership activities, can be evaluated with more ease than with conventional systems. In addition, since this type of budgeting can be used to test different fiscal policies, ways to improve business performance may also be investigated.

CASH BUDGETING RESEARCH

Cash flow planning and cash budgeting have received much attention in the literature in recent years. Gullapalli claims that cash budgeting and planning short-term financial requirements have become major responsibilities of financial management. More importantly, cash flow projections have been recognized as a key to long-term financial prosperity. There is ample evidence that larger and more successful companies have long realized the value of using cash budgeting to anticipate their cash needs and to ensure that their profits are not depressed by holding either too much or too little cash.

Although previous studies have addressed computerized budgeting techniques, their methods generally involve complex mathematical forecasts and simulation techniques which can be used only with mainframe computers. These techniques, while useful for larger firms, may be of little benefit to automotive dealerships with no mainframe capabilities. In contrast, the current study focuses on a simple cash budgeting model that can be used by both small and large automotive outlets who have access to microcomputers, with perhaps no programming capability.

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