Protect Your Gross Profits

How does your total dealership gross compare to a welcomed increase in car-sales volume in this recovery year?

Different pressures exert themselves on our profit margins. The Internet has affected our new-vehicle gross and used-vehicle profits in some cases.

Unfortunately, in many cases, real or perceived, new-vehicle transaction prices have declined due to the competitive pressures in our local marketplaces. Dealers then, often have few options to generate what we all would agree are “decent” gross profits on retailed vehicles.

That's when finance and insurance, accessories and other dealership departments become critical sources of income.

Not only are dealers affected by low gross profits, but these grosses also impact the compensation of our sales personnel and management. In most cases, they are paid on the gross they generate. Tight grosses contribute to our industry's high employee turn-over rate.

In many dealerships, we are also experiencing pressure to maintain our volume and gross in service.

As a result of industry sales during the past three years, many of us have experienced a decline in the total number of units in operation which directly impacts our number of customer service visits.

Unfortunately, this reduction, when coupled with a traditionally low retention rate, is affecting our fixed-operation's absorption coverage. So, more pressure is put on the variable operation to generate gross. It's a vicious circle.

The real pressure from these margin challenges is the relationship between our gross and expenses.

If our goal is 30% (of total gross) net profit, we must manage and control expenses and not let them exceed 70% of our total gross.

With few exceptions, beginning in late 2008, we made tough decisions and took steps necessary to right-size our dealerships based on the business (gross) we were generating.

But when we see traffic and volumes increase, we can let our guards down and fail to monitor our total expense as a percentage of the total gross generated.

To ensure a proper gross-to-expense ratio, assign a percentage goal to each expense category, variable, personnel, semi-fixed and fixed operations.

Then compare the actual monthly results to those goals. This way, you can quickly identify potential trends and take the needed corrective actions before they become serious issues.

Another measurement I constantly emphasize is gross-per-employee. Measure this monthly by department and in total.

If you see negative trends in these monthly measurements, you can quickly identify the cause and take the necessary action.

In addition to trending this internally, compare your productivity with that of other dealers. Comparison information is available from 20 Groups and many manufacturer performance reports.

I've focused on the expense side of the equation. But don't ignore the available opportunities to increase revenue.

I recently spoke with a dealer who said much of his dealership's internal training, both in service as well as new and used, focuses on generating gross.

He mentioned the tendency to “skip steps” as a major cause of gross profit evaporation. So they train on consistency in their processes.

Also leading to higher performance levels are daily save-a deal meetings.

Before the start of the business day, the service staff meets just as we typically do in our daily variable meetings. In these meetings, month to date results are updated and posted, in total and per-advisor. Peer pressure has the same impact in service as it does in sales.

It is exciting to be in a growth mode after all the industry has been through in the past few years. But closely monitor growth and make sure your gross-to-expense ratio is where it should be.

Good selling!

Veteran dealership consultant Tony Noland is at [email protected].

Questions or comments about this column?

Send us an e-mail at [email protected].