By Marilou C. Vroman, CPA, CFE
As time has progressed, we have found more dealers spending time away from their stores and entrusting others to make daily decisions on their behalf. In a perfect world, a dealer should be able to trust all managers to make decisions which are in the best interest of the business, and within the authority granted to that individual. Delegation and empowerment are both necessary to effectively run a business. But how do we know what our employees are committing the dealership to? What contractual obligations or third party relationships are established in the dealership’s name without oversight? Did we just sign up for a painful ten year renewal of our DMS contract or long term equipment lease without the dealer’s knowledge? Did the General Manager give himself new pay plan through new “interpretation” thereof? When did we decide to hire a full-time barista to increase unit sales?
One of the issues we often encounter is the assumption of the degree of authority employees and their managers have to make decisions and commitments on behalf of the dealership and/or the dealer. The degree of authority an employee has is often presumed in accordance with the nature of an individual’s position or title but has not been formally communicated to the employee. It is also possible to have conflicts of interest without documented separation of duties. Some authority may be evident via third party permissions such as bank access to initiate a wire transfer or permission to purchase cars at auction; but these permissions alone do not ensure the expectations of the dealer principal are fully met.
One solution to ensure all employees are on the same page is to establish a Delegation of Authority (“DOA”). A DOA is designed to establish parameters of authority by employee position and by business activity indicating to what extent an individual is permitted to act within their role and without additional authorization. Some activities often found in a dealership’s delegation of authority include:
Capital expenditures.
Inventory purchases.
Advertising commitments.
Long term contracts.
Vendor changes and additions.
Extension of customer credit lines and limits.
Compensation plan establishment and revisions.
Customer service and charitable spending.
Personnel additions and terminations.
Financial adjustments and write-offs.
Outgoing cash, ACH and wire transfers.
The DOA should specify who or what position(s) are authorized to act within each category individually, with a dollar amount limitation, if applicable, and when additional approval is required by the next person in the chain of command. For example, the parts manager may have authority to purchase inventory up to a 60 day supply, the controller may have the authority to approve service customer lines of credit up to $2,000, and the general manager may have authority to purchase equipment up to $10,000.
Dealers should be mindful while creating a DOA to maintain reasonable balance between excessive restrictions or controls and maintaining efficiency of transaction flow in the ordinary course. Restrictions should not excessively inhibit management actions to the point of being inefficient. For example, requiring the dealer’s approval for all disbursements over $75,000 would be cumbersome in light of high dollar value floorplan payoffs or bulk vehicle purchases. Employees granted authority should review and sign the dealer approved DOA, with a copy kept in the employee’s file.
Document your dealership employees’ degree of authority and reduce the questions about “who is allowed to do what.” Clearly defined and transparent permissions and limitations should help close the open checkbook and protect the dealer from surprises in the long run.