Expense Control 101

On the first day of each “General Managers Boot Camp” course that I run with Jeff Sacks, we ask participants to introduce themselves and tell us what they want to learn more about.

Invariably, lots of them point to expense control and expense management.

If you can't get the desired profit on the total business sales volume and resulting gross profit you are currently generating, your only choice is to reduce expenses to a level that will allow you to derive your desired profit.

The approach we take in educating our class in the basics of expense management. Any one of us can look at an expense account stated as a percentage of gross and, by comparing it to a benchmark or guide, determine if the number is out of line.

Often I hear someone say, “My expenses (in a particular account, i.e., advertising) are all out of line.” At that point, I have that person look at the gross profit that the expense number is representative of. In other words, we must determine if we are making accurate comparisons. Is it really a factor of the expense being high? Or is our gross profit low? Once we determine the answer, we can then move to the next step.

When analyzing an account, we must first determine what's being charged to the individual expense accounts.

Management information systems allow us to drill down each account into individual dollar entries. This is the first part of the education of your management team. Once we identify the components of an expense account total, we can begin working on either eliminating or managing the individual parts.

Think of this process as if you are eating an apple and the process you go through to eat it, bite by bite. This is especially true in expense management.

As Jeff Sacks often reminds our Boot Camp students, the physical size of an operating report or financial statement requires combining multiple items into a single space on the report.

So, it is necessary that we understand all of the components to affect a meaningful change. We must first identify the illness and treat it, as opposed to treating the symptoms.

Once we're sure we have a complete understanding of each expense account and all it entails, we can begin the management process. An old idea, but still extremely effective, is the payables party. Here, the dealer or general manager has each department manager present at the signing of monthly payables checks.

Prior to the dealer or general manager signing each check, the responsible manager is asked to justify the expense and initial the invoice. At that point, the check is signed.

This process makes each manager familiar with each dealership expense and facilitates discussion with other managers. It is amazing how many dollars, which might otherwise slip under the radar screen, are discovered during this monthly “party.”

Here's another expense management education tool I suggest: Make it a habit to ask people requesting to spend money where and how they are going to generate the sales dollars required to generate the gross profit required to cover an expense.

Think about this. If your dealership net profit as a percentage of sales is 2%, then it requires $1,250 in sales to generate the $25 of gross required to cover the expenditure. The formula: divide the expenditure by your dealership net as a percentage of sales. Take this a step further and departmentalize it by taking the departmental expenditure divided by the department's net profit as a percentage of sales.

I seldom hear anyone say that expense management is easy. It isn't, but through the proper education of your personnel and continued discussion of how to do it, you should be able to obtain your desired results.

Good selling!

Tony Noland is the president and CEO of NCM Associates, Inc. He's at [email protected]