Control Expenses to Protect Bottom Line

Expect optimism and enthusiasm next month at the annual National Automobile Dealers Assn. convention in Orlando, FL.

U.S. light-vehicle sales came in at 14.4 million units last year, a 13.3% increase over 2011.

WardsAuto predicts vehicle sales to reach 15 million this year. Some optimistic analysts are forecasting sales as high as 16 million. Used-car sales could reach 40 million units, according to some sources.

From a sales standpoint, this is all exciting, but how does it translate to the bottom line? 

According to the latest industry-analysis data available from NADA, dealership net profit as a percent of total sales, pre-tax and owner compensation, increased 7.8% in 2012 vs. 2011, certainly a respectable performance.

How do your numbers compare with that? If you are below that average, what areas in your dealership are holding you back?

I realize it is easier to analyze data than to create the numbers. I also know, from having experience at creating the numbers for years, that high performance is possible, but sometimes we must look in the mirror and convince ourselves of that.

We also must commit to taking the steps necessary to perform at the highest-possible level.

In looking at the NADA numbers, I noticed a specific item that contributed to the 7.8% increase. Let me walk you through a few 2012 vs. 2011 percentage changes to arrive at this one item. 

Total dollar sales were up 9.5%, total gross was up 4.8% and total expenses were up 4.1%. Looking more deeply, the total dealership gross as a percent of sales in 2012 was 14% and the total expenses were 11.5% of sales compared with 12.1% in 2011.

The specific item I was referring to is expense management. Having worked closely with more than 100 franchised domestic, import and luxury dealers during 2012 and watching most of them improve their year-over-year net profit performance, I’ve seen what works. The following are steps dealers have taken to control and minimize their expense burden. 

The first focus involves employee productivity. Refraining having excess personnel. You can maximize your gross while limiting personnel costs.

Reducing employee turnover is another issue. If your turnover is excessively high, look at your hiring procedures. What tools are you using to establish a potential hire’s qualification?  What is your training policy and how effective is it? How closely and effectively do your managers work with new hires to encourage their success? 

Eliminating annual contracts, when feasible, helps control costs. As an example, several dealers I work with have eliminated annual ad contracts. How many times have you had to pay for shortages with a newspaper due to not hitting an agreed-upon level?

Establish a preferred-vendor list. Consolidate the numbers of vendors you use for essential items. Obtain multiple quotes requesting pricing and the services they provide. Then, choose the business you want to use and demand that your staff only do business with those companies on your preferred-vendor list.

Hold monthly expense-review meetings with your management team. This one action will provide visible results, as people realize every dollar of expense is being monitored.

Asset management is fundamental. Establish guidelines for inventory turn, days’ supply and a strict adherence to an inventory aging policy for new cars, used cars and parts.

Without exception, receivables should be a part of management pay plans. During your weekly management meetings, managers should report on the status of their 30-day-and-older receivables and the specific actions they are taking to collect debts.      

Margins in all departments will remain under pressure in 2013. If limited or challenged in our ability to generate gross, take action in managing expenses. Each dollar of excess expense is a dollar of net profit lost.

Good selling!

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