Each dollar of excess expense is a dollar of net profit lost. I’ve emphasized this point more than any other during dealer meetings and in writing my WardsAuto Dealer Business column for the past 17 years.
Dealership margins in each department are under pressure and will continue to be, at least in the near future. It is important to have processes that minimize expenses. Consider the following data.
The average dealership’s total gross as a percent of sales was 13.7% in 2012 compared with 14.4% in 2011, according to the National Automobile Dealers Assn.
Total dealership expenses as a percentage of total sales went from 12.1% in 2011 to 11.5% in 2012. The bottom line pre-tax net profit as a percentage of sales declined to 2.2% from 2.3% during the same period
Recently, a successful dealer asked me to look at his monthly financial statements to see if I could identify areas of concern or ones needing tweaking.
Using a current statement and one for the same month the year before, I checked the month’s gross and year-to-date gross to ensure it was consistent. I then scanned expenses, comparing them as a percentage of gross.
In a specific account, the most recent month’s spending exceeded the monthly average and was considerably higher than the previous year.
I asked the dealer for details of his supplies account. Reviewing that information, I noticed a few unusual items and contacted the dealership’s accounting department. I discovered that a significant item had been incorrectly charged to the supplies account. Upon investigating, the dealer learned his relatively new payables person didn’t realize this item belonged in an inventory account rather than expensed out.
In my retail life, I had a similar expense. During a monthly expense-review meeting, which included our payables person, we discovered a few areas that appeared to be out of line based on our gross.
When we analyzed these accounts, we found items that had been charged to them in error. When questioned, the payables person said no one had ever told her where to charge these items. This was an “ah-ha” moment for me.
As a best-practice matter, dealers should hold monthly expense-review meetings. Include your payables person.
Before each meeting, managers should receive a report detailing all expenses charged to their departments. That ensures they come to the meeting with the facts.
One of the oldest and best processes dealers can employ is a monthly check-signing “party.” All payables checks are prepared and separated by department. Each manager reviews and briefly discusses each payables invoice and then initials or signs the dealership’s copy of the check, noting their approval prior to the dealer principal signing the actual check.
This ensures that all expenses are scrutinized and accurate. If there’s a problem or an authorization issue, it can be addressed immediately. Not only does this process educate your managers on all of the dealership’s expenses, it also raises the level of accountability.
One of the most valuable and useful tools for expense management is the Operating & Expense Profiles published annually by NADA’s 20 Group Division. By franchise, it provides operating and productivity profiles as well as, in my opinion, the most useful item: the expense profile.
The expense profile matches your manufacturer’s statement. Each expense category includes a guide percentage for the total dealership and for each operating department, stated as an expense as a percentage of gross.
In today’s environment, it is essential that we stay on top of and control our spending.
Good selling!
Tony Noland of Tony Noland & Associates is a veteran dealership consultant. He can be reached at tonynolandandassociates.com.
