Sub Categories Tell More

While examining our dealership financial statements, certain expense-category percentages often jump out as being high compared with guide or goal numbers.

Sales commissions and policy expenses jump out a lot.

When comparing any expense percentage with a guide, first compare your gross. Quite often you will find high-expense percentages are a direct result of inadequate gross.

Assuming your gross is in line, the next step is to identify the specific items being charged to the expense category. When we look at a financial statement, composite, etc., we only see the total dollar amount charged to an account and the resulting percentage of gross. It's hard to account manage with just that information.

Let's look at sales compensation as an example. The guide I'm comparing with indicates the average dealer's new-vehicle sales compensation is 21.5%. Yet my number is 28%. My gross per retail vehicle is comparable with the average, I don't pay on holdback and I have a hard pack that is applied prior to calculating commissions.

So what could be causing this out-of-line condition? The 28% example here is the symptom, not the illness.

As noted previously, prior to arriving at a solution, we have to identify the specific items that make up this number. We do this by using sub accounts. Using those, we can monitor and trend the individual components of an expense category.

After obtaining a detailed report from the comptroller, I find this account includes sales commissions, spiffs, new sales person salaries, i.e., trainee and minimum wage guarantees. The next step is to see what percentage each of the items included in this expense represents as a percentage of my gross. Let's look at the following simplified example:

One more question to consider while analyzing this account:

Do you know how many, or the percentage of deals you have paid a minimum commission on? If not, begin tracking the number this month. I can't tell you what the right number is, but after determining our performance, if we see the percentage is high, it might indicate a need for training, changing the method we are working our deals or focusing more on cash down.

Let's take a brief look at our departmental policy expense accounts. Again, what items are included and what does each item represent as a percentage of the total? Remember, you may have as many sub accounts as needed to monitor accounts.

In the new-car and used-car departments, items may differ from those in service. For example, in used-car policy, if a dealership has an internal extended service agreement it sells, repairs completed during the first 30 days of the policy period often are charged here and should be included as a sub account.

In many dealerships, comptrollers set up individual sub accounts by individual service advisor to monitor and track individual contributions to the policy account. Here's an example of that:

To be an effective expense manager, break down each individual expense category to the lowest common denominator. Then, armed with this information, implement controls that help bring the account into line. Remember, an out-of-line percentage is the symptom, it's not the illness. Good selling!

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