Robert A. Bonavito, CPA PC

Order Management Cycle "OMC"

When you are performing forensic analysis or business valuations, one of the most important yet overlooked aspects is understanding the OMC process. Our firm recently had to perform a valuation on a business that had several other valuations performed within the past few years. We reviewed all the valuations; while they were professionally prepared, it was obvious that no one took a close look at the OMC. Key areas were missed or overlooked because there was not a thorough understanding of the OMC.

The business appeared very basic, but when taking a more in-depth look, it became apparent that the company was extremely complicated. The other valuations lacked a deeper understanding of the business, and its OMC process, which meant much of the risk of the business was not understood.

The company operated in the used car industry segment referred to as a Buy Here Pay Here, (“BHPH”). By analyzing the OMC, we quickly realized there was a tremendous amount of risk in the car sales industry, which were primarily financed by the company because many of the purchasers could not obtain financing through traditional avenues. A detailed analysis of the receivables showed that close to 50% of the receivables would not be collected.

The BHPH OMC process that we discovered works as follows:

  • A customer comes in with no credit history and needs to purchase a car. Typically, they can afford a $2,000 to $3,000 down payment and the car cost is approximately $7,000.
  • In order to make the sale, the BHPH used car dealer will offer to finance the remaining $4,000 based on an agreed-upon monthly payment. This payment typically includes a 30% markup on every $1,000.
  • The total amount owed on the $4,000 utilizing this concept would be $5,200 financed over a 24-month period. This would result in a $216 monthly

The national BHPH used car company had receivables totaling over $20 million. We estimated that subtracting the cost of collection and write-offs, only about $10 million would be collected.

The only way you would find this would be by utilizing an understanding of the OMC of the business. The various steps that would be taken can be seen in the video. This is useful because while the OMC varies from industry to industry, most small businesses and large corporations utilize the same basic steps when handling the customer that comes in the door.

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