Identify Excess Spending

We all know that each dollar of excess expense is a dollar of net profit lost. So, how do we keep our expenses in line?

This is hard if you do not assign each expense account a budget based on a specific set of criteria. First, identify a desired and realistic net profit figure, prior to including other additions/deductions, as a percentage of your total dealership gross.

If my net profit goal is 15%, then my expense budget becomes 85% of the gross. For example, if my total gross is $100,000 with a desired net of $15,000, my total expense budget is $85,000.00.

I then take the $85,000.00, which represents 100% of my expense budget for this example, and begin breaking it down by expense category on a percentage basis to establish the category budget as shown in the example below using a General Motors Corp. statement format.

So, what's the maximum allowable percentage and dollar amount by category without exceeding our budget goal?

Once you've established the category budgets, establish a budget for individual expense accounts within each category.

Look at this example using personnel expenses. My total personnel expense goal may be 45% of total departmental gross, but in reality it represents 52.94% of my total expenses.

To reduce the expense as a percentage of gross, I have two options: increase gross or reduce expense. The only way I can earn a larger expense budget for personnel expense is to take it from another area because we only have a total of $85,000 for expenses.

In the Personnel Expense category chart example shown above, I realize this may be a different and more in-depth way of looking at your expenses. But I assure you it will be almost impossible to complete this analysis without identifying areas where there are opportunities.

The examples here are for the total dealership, but it is recommended you take this study to the next level and complete it by department. To get a handle on certain accounts and control the dollar expense amount, utilize sub-accounts and other methods that identify specific items which might be out of line.

One example I often use when speaking to groups is that of salesperson compensation. We can look at our statements and see compensation as a percentage of our gross may be high, but what does that mean?

Is our gross too low and distorting the number, or is it a situation where we are paying guarantees, excess spiffs, etc.?

This process is a project, but once completed, it will let you quickly identify and correct areas that are out of line.

Good selling!

Tony Noland ([email protected]) is the president and CEO of NCM Associates, Inc.