Cost Management: Boost Profits by Shrinking Expenses
At most dealerships, there’s a strong emphasis on increasing sales – and rightly so. Having more vehicle sales usually translates to increased revenue and potentially higher profits.
But there’s another side to the profit equation that’s just as important as sales: expenses. Cutting and controlling costs is as consequential to boosting profits as increasing sales – if not more so. Thus, expense management should be a high priority for your managers.
There are many different types of dealership expenses, which can sometimes make it hard to get a good handle on expense management. This is especially true in dealerships that practice decentralized management, where no single person is responsible for controlling how dealership monies are spent.
So the first step to controlling expenses is to centralize purchasing as much as possible. Ideally, the general manager will sign off on purchases, or at least major expenses. From here, purchases should be controlled at the department level. For example, sales, parts and service and F&I managers should be required to approve all purchases made within their departments.
One strategy is to have a check-signing “party” in which all department managers are brought together and quizzed while the owner or general manager signs vendor checks. This puts managers on notice that their spending decisions are being scrutinized. And it may encourage them to use more discretion when approving departmental purchases.
Another strategy: Create a list of all dealership expenses over the course of a year and separate them into three categories: “must-have,” “nice-to-have” and “don’t need.” First let your department managers provide input on which expenses should fall under each category. The general manager or owner should make the final call on expense categorizations.
Using expense reduction strategies
The bulk of dealership expenses usually fall into one of three broad areas: 1) payroll and benefits, 2) advertising, and 3) floor plan interest. Here are some suggestions for reducing expenses in each:
Payroll and benefits
Dealerships must walk the fine line between paying employees too little, and thus being unable to hire and retain quality workers, and overpaying. To find the right balance, first determine what similar dealerships are paying for various positions in your area. Doing so will give you a benchmark for setting your compensation. NADA conducts an annual Dealership Workforce study to collect some useful data. Dealer 20 groups are also a good source for this kind of information.
Next, conduct a compensation review to analyze the total amount of salary, wages and benefits allocated to each of your employees. Compare this to your benchmarks and to each employee’s most recent performance review. Then make adjustments as necessary to bring compensation in line with benchmarks and performance.
For many dealerships, advertising is a “black hole” into which they pour tens of thousands of dollars each year, but have little idea of their return on investment (ROI). Thus, you should work with your advertising agency to measure the effectiveness of your advertising. Eliminate strategies that are ineffective and devote these funds to more successful campaigns that generate positive advertising ROI.
If you haven’t bid out your advertising lately, consider doing so. Over time, your advertising agency could raise your rates 5% to 10% a year without a correlating increase in effectiveness. However, you might not realize this unless you perform an advertising cost-benefit analysis. Let your current agency know you’re soliciting bids and ask them and potential new agencies for some fresh new creative ideas.
Floor plan interest
The key to reducing floor plan interest expense is managing your vehicle inventory judiciously. Interest costs can spike dramatically when vehicles sit on your showroom floor for longer than 45 to 60 days.
Another way to reduce floor plan interest is to take advantage of cash management deposit accounts offered by some manufacturers’ finance companies. These accounts enable you to earn a credit on deposited funds that can help offset your interest expense.
Also, if you haven’t recently, shop your floor plan line of credit. Competition has increased among banks and finance companies, which you may be able to use to your advantage.
A balanced approach
Don’t become so focused on sales that you neglect the expense side of the profit equation. By cutting costs in these three areas, you may be able to boost profits without significantly increasing your sales volume.
Sidebar: How to avoid these floor planning mistakes
Smart floor planning is a critical financial skill for dealerships. Here are three common floor-planning mistakes to steer clear of:
- Overextending financially. Use your floor plan line of credit to buy only as much inventory as you reasonably think you can sell. Overbuying can lead to aged inventory and missed payments.
- Not communicating. Banks and finance companies hate surprises, so keep your floor plan provider informed of anything that could affect your dealership financially.
- Raising red flags. In particular, floor plan providers tend to be on the lookout for bounced checks or Automated Clearing House (ACH) items because of insufficient funds and vehicles sitting on the lot for longer than 45 to 60 days.
Dealer Insights - May/June 2017