Avoid Getting Caught in Percentage Trap

Have you ever looked at your financial statement’s expenses and thought they were too high? 

Too high compared with what? Your historical dealership average? Other members of your 20 Group? Or the composite data auto makers provide to their dealers?

A common tendency is to look at an expense percentage, think it is too high and make assumptions without identifying the root cause. First, and this might not come as a surprise, there isn’t always consistency in how dealers charge items to accounts.

I can name any number of accounts where charges are all over the board. So what is the right number, or what is the proper accounting method?  If I’m comparing two dealerships’ expense percentages and the expense charges differ, is the number credible?

A perfect example is the expense account for delivery of a new vehicle. We all know the pre-delivery costs of new vehicles are charged to this account. But where are the manufacturer’s credits applied, to the new-vehicle or service department?

What about the cost of cleaning and prepping the new vehicle? Do you use a part of the manufacturer’s pre-delivery and prep credit to offset this cost? In addition to the pre-delivery cost, there are fuel expenses.

What is your policy on cleaning vehicles for deliveries? We’ve discussed the small credit dealers receive for the original prep and cleaning of the vehicle, but usually there are additional costs.

There also are the fuel and operating costs associated with demonstration drives. Where are those charges on financial statements? Where are the routine weekly inventory washes being charged?

What about dealer trades? If you sell a vehicle that isn’t in your inventory, chances are you will obtain the vehicle from another dealership. When this vehicle is brought into your store, do you send it to the service department for a pre-delivery inspection?  Chances are you do, but where is the expense of that inspection charged? Is it to the vehicle as a cost-of-sale item or is it charged as a delivery expense? 

Lastly, what about the driver’s wages and fuel for a dealer trade? Are those a delivery expense or a cost of sale? With so many variables or options available to a dealer, it is easy to see how we can have such large percentages variances in an account. 

Other than payroll, few dealership accounts are maintained with 100% consistency. But the comparison percentages we utilize are a credible reference, if for no other reason than to verify we are in the ballpark.

One of the biggest mistakes when comparing our expenses as a percentage of gross with those of other dealers is that we immediately are drawn to the expense percentages without beginning at the top. 

The top I’m referring to is the gross. If expense charges aren’t consistent, it’s not a valid comparison. 

For example, if my gross is $20,000 and I spend $3,000 for advertising, my advertising expense as a percentage of the gross will be 15%. 

In the comparison group, their average gross is $25,000 and they spend the same $3,000 for advertising, the expense as a percentage of their gross will be 12%. My point here is that often it isn’t the expenditure, but the gross income that is the issue.

So, dealers at 20 Group meetings will ask “What is the right percentage for this?” and “What is the benchmark for that?” 

Just remember, all comparisons should start with a comparison of the gross. Otherwise, you risk becoming a victim of the percentage trap.

Good selling!

Tony Noland of Tony Noland & Associates is a veteran dealership consultant. He can be reached at tonynolandandassociates.com.