Keep an Eye on Your Spending

Each meeting cycle, NCM provides our 20 Groups with a special study that lets members take a closer look at a particular area of their business.

The focus of the first-quarter study was expense management and, as any of you who follow this monthly column know, this is a subject that is near to my heart.

First, I realize the dollar amounts are ultimately what count in the end. But we budget and manage our expenses based on their percentages of gross profit. This is where some of us get into trouble. Let me explain.

Traditionally, at year end, when preparing our budgets for the subsequent year, we first forecast our dollar sales and then our gross profit.

The next step is to arrive at a total expense budget for the year that will probably equate to 70% to 80% of our total dealership gross.

Next, based on historical information and current knowledge, we forecast our expense budgets based on that individual expense item's percentage of gross.

So, as an example, let's say your forecasted new- and used-vehicle average month's departmental gross is $200,000, and we agree that our net advertising budget goal stated as a percentage of departmental gross is 10%.

So, we arrive at a monthly budget of $20,000 for advertising. But if we are unable to deliver on our gross profit projection, we have to make changes in the budgeted amount for advertising.

If we have spent the $20,000, yet our gross is only $175,000, our expense as a percentage of gross has increased to 11.4% versus the forecasted 10%. In order to make the necessary adjustments, it is essential we recalculate our budgets and reduce the appropriate expense spend.

In this example, we would reduce ad spend for the period to $17,500. The task of monitoring this and making the required adjustments falls on you the dealer or your comptroller.

Another scenario I often come across is where a dealership has reduced the dollar spend in an individual expense account, yet that expense, stated as a percentage of gross profit, has increased.

There are only two ways to correct this situation. We must further reduce the expense, or increase our departmental gross. To my knowledge, these are our only options.

One reminder, referring back to my example for our advertising budget:

As we all know, our annual business results are not evenly divided into 12 equal parts. Looking at the 12 individual months, we need to determine each individual month's contribution to the total both from a gross, sale and expense standpoint.

Even though it's most likely not the most scientific approach, I have found that, in applying this methodology, I don't experience the big swings.

For example, if January represents only 6% of my annual forecast from a gross standpoint, then 6% of my annual advertising budget of $240,000 equals a monthly budget of $14,400.

Thus, when my gross is lower in January than other months, my advertising expense falls into line.

If you haven't prepared a simple spreadsheet breaking down 2006 and 2007 by sales, gross and expenses; by department; and by month and then adding 2008 at each month end, please do this. The steps we must take will become.

Expense management is not easy, but it does become more manageable if each manager has a complete working knowledge of your total dealership plan.

A monthly meeting to review expenses compared to budget is a good first step.

My experience is that good ideas will come from managers who may not necessarily be affected by a particular operation. It is a matter of someone not directly involved in an operation, in contrast to people who are smack in the middle of it, seeing things that may otherwise be overlooked.

Keep your eye on expenses and well as profits, and you will see positive results.

Good selling!

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

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