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Cost Reduction - A Back Office Perspective

Seminar Objectives 

  • Provide a starting point for locating opportunities for expense reduction
    • Industry Guidelines
    • Year to Year variations
    • Expense as a percentage of Gross Profit
    • Expense per unit sold
    • Expense per employee
     
  • Moving forward from the starting line
    • Benefits to be realized
    • Challenging vendors
    • A list of vendor alternatives to assist in cost reduction
     
  • Provide ways to interact with department managers
    • Identify department needs
    • Consistent message and meetings
    • Seek employee input
     
  • Sample of ideas
    • Open discussion of cost reduction ideas
      • Presenter ideas
      • Participant ideas
       
     

Getting Started-Why Cost Reduction 

  • Benefits to be realized
    • The office can help in the profitability of the dealership.
      • A 1% reduction in expenses at a dealership that 2.75% of sales drops to income has the same P&L effect as a 1.04% increase in sales.
       
    • Eliminating unnecessary expenses or wasteful spending can create additional cash reserves and company value
     

Getting Started 

  • Plan to reduce expenses
    • Dealership wide reductions
    • Prioritized reductions
    • Departmental reductions
    • Budget reductions
    • Reductions based on analysis
     
  • Cost Reduction Program
    • Management planning on specific expenses not an expense wide 10% reduction
    • Implementation of a plan of action with employees involved in the process
    • Process to include a complete questioning of all expenses.
     
  • Sources of Industry Guidelines
    • 20 groups
    • NADA
    • Manufacturer
      • Under utilized programs
       
    • Financing Arm
    • CPA
     
  • Challenging Vendors-Best Practices
    • Secure current bids for all major expenditures
      • Create your specifications carefully to secure current bids
      • Obtain volume discounts
      • Challenges suppliers to bid price and value-added services
        • Typical bids
          • Insurance/Employee benefits
          • Office Supplies
          • Courier Services
          • Data Processing
          • Telephone
          • Contractor Services
          • Check guarantor services
           
         
       
     
  • Vendor Alternatives
    • Utilize industry contacts
      • ADAGP CFO 20 Group/ PAA CFO 20 Group
      • Supplier competitors
      • Industry Association members
      • Internet
      • Previous suppliers, bidders
        • Request a new bid
         
      • Attached list as a starting point
       
     

Getting Started-Identifying Opportunities 

  • Industry Guidelines
    • A Benchmark is a point of reference for any measurement. These guidelines allow dealerships to measure themselves against an average, the best performers, or a geographic area.
    • Comparing your results to benchmarks allows the dealership to identify strengths and weaknesses.
    • Expense as a % of Gross Profit
      • This guideline can show if your expenses are relative to the benchmark as a percentage of your gross profit. Are you spending too much on an expenditure in relation to your gross profit?
       
    • Year to Year Variations
      • This analysis can identify expenditures that have increased from one year to the next.
      • Utilize a Three Year Analysis
       
    • Expense per Unit Sold
      • This guideline indicates the amount of a particular expense per unit sold. Variable expenses such as advertising, vehicle maintenance and Floor Plan Interest can be measured per unit.
       
    • Expense per employee
      • This guideline can help indicate whether employee complement is appropriate
       
    • Frozen Capital Analysis
      • This analysis provides an indication of idle assets that if turned into productive assets may lead to additional profits.
       
    • Cash Flow Analysis
      • This guideline will show what happened to the profits of the dealership. Did the profits turn to cash. If not what happened within the balance sheet.
       
     

Interaction with Department Managers 

  • Monthly Manager Meetings
    • Moderated and agenda set by Controller
    • Discuss analysis performed
    • Bring vendor invoices
    • Create a forum for ideas on expense reduction
     
  • Coaching on Financial Statement
    • Obtain Dealer approval
    • Most managers have not had training on reading their department’s financial statement
    • Show the impact of their actions
     
  • Open Lines of Communication
    • Create open dialogue between managers
    • Create a team approach-All oars rowing together
     
  • Motivate through Pay Plan
    • Have a component of pay to reduce expense and improve departmental profitability.
     
  • Include employees in discussions
    • Monthly cost saving memo’s
    • Celebrate success
     

Ideas 

  • Limit Expense Authority to Department Managers
    • Hold departments accountable for Purchasing decisions
    • Enforce purchasing policies
    • Use a purchase order system
    • Eliminate waste
    • Place dollar authorization limits on different levels of authority in the business
    • Consider having a purchasing “Champion”
     
  • Monitor Departmental Budgets
    • Overall budgets without departmental budgets are like having no budgets because there is no accountability
    • Restructure accounting department
    • Force your accounting department to become a profit center by allocating and monitoring budgets
    • Use your budgets to adjust your plans
     
  • Link Bonuses to Performance
    • Establish rewards and consequences system
    • Pay incentives frequently
    • Set clear and measurable goals
    • Set team goals and incentives
    • Set company goals
    • Tie compensation to the achievement of goals
     
  • Eliminate unnecessary Utility Costs
    • Most utilities offer no-cost audits
    • Check into
      • Rates available
      • Time of day usage
      • Billing practices and accuracy
      • Energy saving technology
      • Policies and Procedures
      • Culture of conservation
      • Hiring a utility consultant
       
     
  • Reward your Employees for Bright Ideas
    • Who is the most qualified consultant for any business
    • Suggestion boxes don’t work, require that everyone contribute ideas
    • 5-5-5-5 Program
      • 5 ideas to improve the company
      • 5 ideas to improve their department
      • 5 ideas to improve their own role within the department
      • 5 ideas to improve customer service
       
     
  • Reward your Employees for Bright Ideas
    • Employee empowerment comes when they know they have the ability to create change. You must act on every suggestion
    • Pay for suggestion
     
  • Lock the Supply Cabinet
    • Office supplies expense increase every year at Labor Day
    • Instituting controls provides a typical supply savings up to 30% of what you are spending
    • Refilling cabinets with excess supplies in desks with an Amnesty Day
    • Standardizing the supply purchases-------all non-standard purchases require purchase orders
    • Substituting generic products for name brands
    • Encouraging re-using and recycling supplies (Binders, scrap paper)
     
  • Trim the Cost of Credit Card Processing
    • Negotiate discount with vendors
    • Accept debit card payments
     
  • “Lease” your Employees to Other Businesses
    • Administrative people (title clerks, warranty clerks)
    • Level out seasonal needs
    • Full staff requirements – Partial expense
     
  • Take advantage of Purchase Discounts
    • 2/10 Net 30 = 35% per annum
    • Negotiate discount with every supplier
    • Negotiate long term debt repayment discounts
    • Schedule payments to take advantage of discounts
    • Set up a new general ledger account “Purchase Discounts Lost”
     
  • Use Spare Cash to Pay Down Lines of Credit
    • Set up a cash management account to offset floor plan expense
    • Use an automatic sweep arrangement against lines of credit
    • You can re-borrow when you pay the line down, as opposed to paying off term debt.
     
  • Form a Cost-Cutting Committee to Trim Waste
    • Create cross-departmental teams to assist each other in increasing efficiencies
    • Find out what reduces productivity ( ask the people who do the work)
    • Let employees set goals and help them achieve them
    • Employees are part of the process
    • Encourage a profit culture
     
  • Keep Tabs on Your Competitors’ Prices
    • Shop your competition
      • Labor Rates
      • Parts pricing
      • New & Used vehicle sales
       
    • Compare vehicle offerings
    • Find out if your price is too high or, worse, too low
     
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