A typical auto dealership is actually five different businesses operating as one. The five business units, consisting of new vehicles, used vehicles, service and body, parts and accessories, and finance and insurance, are organized and accounted for as departments. Each has different operating characteristics in terms of staffing qualifications, customer base, industry and economic drivers, and compliance environment among others.
Sales revenue is the lifeblood of any commercial enterprise. While success in the dealership industry can be positively impacted by management decisions involving sales and marketing programs, or being in the right location with the right franchises and mix of inventory at the right time, revenues are also impacted by any number of influences existing outside of a dealer’s control. Competition and general economic conditions are among many examples.
Conversely, managing gross profit is largely within dealer control. Because gross profits need to be sufficient to absorb operating costs and provide adequate return on investment, they are critical to the financial health and success of an enterprise. Gross profit can be actively managed by dealers and any incremental improvements realized generally fall directly to the bottom line. So, it is critically important that any and all opportunities to improve grosses are identified and implemented.
Regular review and monitoring of departmental gross profit should be performed at least monthly. Dealers have a variety of sources available to measure their results against industry averages for all five departments. It is important to maintain perspective when making these comparisons. There may be very good reasons for a particular department varying from the industry average either positively or negatively. Generally, however, if the variance from the standard is 20% or more, the reasons for the variance should be identified, and particularly in the case of a negative variance, prompt corrective action taken.
The key objective then, is to develop a clear understanding of why your results vary from the rest of the industry on a departmental basis and to use that understanding to correct negative variances or enhance positive ones. Failure to do so can have a significant detrimental effect on earnings.
BSSF’s Auto Dealer Practice: If you have any questions regarding this newsletter, please contact the Auto Dealership Practice leaders, Dana Nonnenmocher, CPA, CVA, Principal or Julie Kullman, CPA, Principal at 717-761-7171.
ABOUT THE AUTHOR
Dana S. Nonnenmocher
Dana is a Principal at Brown Schultz Sheridan & Fritz. As a key member of the Firm’s Auto Dealership Group, Dana assists dealerships with accounting, tax planning, operating and compliance issues, succession planning, and more.