I'm excited to have been invited to conduct a profitability workshop during the summer dealer meeting of a major import auto maker.

We have limited it to four key areas that affect dealership profits. While there are many areas, when held to four, I went with: personnel productivity, expense management, asset management and departmental contribution. Let's look at each.

  1. Personnel Productivity is a key to profitability and affects the other three items. It is essential that we have a proper balance between our productive and support staff, not only at the dealership level, but departmentally as well. If the mix of productive-to-support operations falls below 50% in any department, you likely will have a lower than ideal monthly gross per employee, and your employment expense, both from a percentage and dollar standpoint, will most likely exceed your target. For reference, the latest statistics from the NCM database are:

    Category Domestic Import Highline Us
    Gross Per Employee $7,356 $7,239 $11,077 $
    Productive Staff % 56.3% 58.4% 55.0% %
  2. Expense Management: This is largely a function of establishing a budget for each individual expense category and individual expense within the category. Operationally, if our net profit goal is 15% of total departmental gross, our expense budget cannot exceed 85% of that gross. A first step in creating an expense-management culture within your organization is to educate personnel. Believe it or not, all dealership expenses can be lumped into one of four categories: Nice to have, want to have, need to have or have to have. Once we establish this, we can expand our management education. One of the better methods is “payable parties.” Department managers sit down with the dealer when he or she signs payable checks. Before that, each manager must discuss their departmental expenses and sign a copy of the check. This implies ownership. The beauty of this is that all managers will listen to the individual explanations and offer feedback. It is amazing to see the results of this one action.

  3. Asset Management: This starts at the top. You, the dealer, have to establish and enforce ground rules. It is important that each manager knows the inventory level ground rules, i.e., days' supply. It is also important for management to realize inventory levels are potentially moving targets, based on seasonality.

    In addition to creating operating standards for inventories, you should also educate your managers on cash management and the impact of asset management on cash. How often is a cash strain a result of poor asset management?

  4. Departmental contribution. There are no known methods to totally protect your operation from an economic collapse. But you can leverage your exposure in the event of a market downturn. Early in our ownership careers, we learn the importance of having high fixed coverage and its effect on profitability. But do we take the necessary actions in our operations to actually accomplish this? Remember, a high fixed coverage normally indicates an operation that emphasizes parts, service and body shop in an expense-conscious culture. The other benefit of high fixed coverage is its ability to minimize your exposure when new- and used-vehicle sales are challenged, i.e., it reduces your burden.

Following are statistics from our most recent Benchmark® database which indicates the individual departmental contributions as a percentage of the total departmental gross. Due to rounding, the total will exceed 100%.

Dept. Domestic Import Highline Us
New Vehicle 20.9% 26.6% 23.8% %
Used Vehicle 28.7% 25.3% 16.2% %
Parts Dept. 19.5% 17.5% 22.8% %
Service Dept. 24.4% 27.6% 35.4% %
Body Shop 10.4% 10.7% 7.2% %

There is much more to profitability than I am able to include here or in my upcoming hour-long presentation. But I hope this provides some thoughts that will result in your increased profitability.

Good selling!

Tony Noland is the president and CEO of NCM Associates, Inc. He is at tnoland@ncm20.com.