Benchmark Your Expenses

Let's look at the expense structure of our pre-owned vehicle departments.

Assume you are really in the used-car business, not just utilizing your pre-owned department as a graveyard for new-vehicle expense.

The pre-owned vehicle department should stand on its own and share an equal contribution with the other departments to the bottom line.

The first question to ask is: Are you profitable? If not, is it a result of not enough vehicle sales and gross or is your department's expense structure to blame?

How should expenses in the pre-owned vehicle department be structured? What percentage of your gross should be going to sales commission, advertising and employment expense if you are to realize a net profit?

An advantage I have in my work with NCM Associates is that we deal with thousands of dealers and are able to compile benchmark data that is timely and relevant to the current market.

The benchmarks we use in our 20-Group sessions are computed bi-monthly and are realized by taking an average of the top 50% of our dealers. Because the benchmarks are an average of the top 50%, keep in mind there are dealers doing better and others not so well. But this method produces data on the 75th percentile providing percentages that can be used as achievable and realistic guides.

Using the first chart, compare yourself to the 75th percentile dealers' results in major expense areas as a percentage of pre-owned vehicles operating gross.

The retained income would be before occupancy/fixed and any unallocated expense.

Some will be much better than this and it is not unusual to find dealers retaining 45% to 49% after controllable expenses. But what if you are not this good?

Start your drill down with the three biggest expenses: commission/personnel expenses (as well as salaries and bonuses), advertising and interest.

The chart below shows where benchmarked dealers fall in those areas.

Start with the big numbers, then drill down in each account. Ask what is going there. Remember, a number or a percentage is just a symbol that represents a result (good or bad) of a behavior.

A good example would be if, during your drill down, you discover your commissions are too high as a percentage of your gross. Is it your pay plan or are you paying too many flats on aged inventory? Is the aged inventory a result of stocking the wrong vehicles or pricing them over the current market? Could the same be said for the interest expense? Are there expenses being dumped in the pre-owned vehicle operation that should not be there? Is your advertising expenditure paying off?

Again, these percentages are not absolutes. They are symbols that represent the result of good policies and procedures. Find out what the better dealers do by way of best practices. Set the benchmark as a goal you would like to obtain.

Tony Albertson is executive conference moderator for NCM Associates. He is at [email protected].

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