With every passing week, I’m witness to a growing number of dealerships whose expenses have been creeping upward. It’s often a topic of conversation, and after the past few years of volatile sales, some bad habits are back.
One of the most dangerous habits is neglecting to conduct a monthly review of dealership expenses and where they come in as a percentage of gross profit.
What caused this bad habit to return?
This can be attributed to several factors, particularly the pressures and dynamics of recent years.
- Volatile sales environment. Over the past few years, dealerships have faced unpredictable sales patterns due to various economic factors, including the pandemic, supply chain disruptions, and fluctuating consumer demand. During such times, the focus often shifts to survival – securing sales and managing inventory – leaving expense management for another “less stressful” time.
- Temporary financial relief. Many dealerships received financial relief through government programs, subsidies, or loans during the tough times. I’ve found that in some cases, the temporary relief created a false sense of security, leading to less stringent dealership expense management practices.
- Increased focus on revenue generation. When sales are uncertain, there’s a tendency to prioritize revenue-generating activities, often at the expense of cost control. The emphasis shifts to driving sales and growth, often sidelining the critical need to manage dealership expenses proportionately.
- Post-recovery complacency. As some semblance of stability returns, there’s a tendency to assume that things have “returned to normal,” leading to complacency. Dealerships may assume that the revenue stream is stable enough to not require rigorous expense monitoring, which can be a dangerous assumption.
- Complexity and overload. The modern dealership environment has become increasingly complex, with multiple revenue streams, digital transformation efforts, and new compliance requirements. Managing all these aspects can lead to information overload, causing some critical activities like expense review to slip through the cracks.
- Cultural drift. Over time, as the urgency of survival diminishes, there can be a cultural drift where the discipline of regular expense review is lost. Newer managers or staff might not have experienced the leaner times and therefore may not fully appreciate the importance of regular dealership expense review and expense control.
The combination of external pressures, temporary relief measures, and shifting priorities has led to the re-emergence of this bad habit. Without regular expense reviews, dealerships risk eroding their profitability and financial health over time.
But these are not the only reasons why regular monthly expense reviews are not common practice.
Strong financial management is the cornerstone of a thriving dealership.
A truly profitable dealership achieves two key financial goals:
- It generates a healthy gross profit.
- It keeps its expenses within manufacturer-specific benchmark percentages of that gross profit.
The reasons I previously listed for neglecting a monthly expense review assume one crucial factor: the presence of knowledgeable leaders who understand the critical relationship between expenses and gross profit. However, this assumption may no longer hold true in many dealerships.
In recent years, I’ve observed a concerning trend:
- Dealership owners (dealers) are showing diminished financial literacy.
- Controllers are demonstrating less expertise in their field.
This erosion of financial acumen at the store leadership level has significant implications.
Without a solid grasp of financial principles, these key decision-makers may not fully appreciate the importance of regular expense reviews or how they impact the dealership’s overall profitability.
This decline in financial knowledge among top management represents a fundamental challenge to maintaining healthy dealership finances, beyond the external factors and shifting priorities I mentioned earlier.
Many dealership owners I’ve encountered recently seem to have a limited understanding of their financial statements. While they closely monitor daily sales figures, they struggle to interpret their income statements effectively. Even more concerning is their lack of familiarity with the balance sheet. When this knowledge gap is combined with an inexperienced controller/accounting manager, it creates a potentially dangerous situation for the business.
Financial literacy is effective disaster mitigation.
Many current dealership owners and employees have never experienced a forced closure by banks or the Department of Motor Vehicles (DMV). I can tell you from experience, it is a jarring and distressing event. While financial troubles or regulatory issues may have been building for some time, the actual closure often comes as a sudden shock.
Imagine arriving at work one day to find the doors padlocked. Your most recent paycheck might bounce, and if you’re not in upper management, you may never learn the full story behind the closure. For most staff, it’s a bewildering and abrupt end to their employment.
This situation underscores the importance of financial literacy and regulatory compliance. It also highlights how quickly a dealership’s fortunes can change, often with little warning to the majority of its workforce.
How do we fix it?
One of the best ways to avoid “scary surprises” is to perform a monthly dealership financial statement review. Part of that review would be Expense Analysis. Here are the steps:
1. Determine your benchmarks. Your manufacturer should have the benchmarks for expense as a percentage of gross profit. If you belong to NADA, they have a nice dealership operating report that they generate every year that includes those benchmarks.
2. Determine your store’s total gross profit for the month from your financial statement.
3. Determine your store’s four main expense groups from your financial statement. For most franchises these are:
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- Selling or Variable Expense
- Personnel Expense
- Semi-Fixed Expense
- Fixed Expense
These are all listed on the Income Statement in this same order as categories.
If you’re a Ford dealer, it’s a more complex undertaking due to Ford’s financial statement design. It’s generally the same approach but if you’re not familiar with these terms, it can get confusing. Contact me here and I’ll provide a simplified spreadsheet.
4. Calculate each of the four expense categories as a percent of gross profit. Some manufacturer’s financial statements will do this for you (the percentage is just to the right of the expense listed). If not, take the expense category total, let’s use Semi-Fixed Expense and divide it by your gross profit. That will give you the percentage of gross profit for that expense category.
5. Now, compare your percentages with the manufacturer’s benchmarks. Identify where your expenses were higher than and/or lower than the benchmarks and determine why.
I’ve just taken you through the steps of a high-level review. Each expense category contains several different dealership expenses that should be analyzed/reviewed. It often takes a deeper dive to determine exactly where the differences lie and why they are out of line from benchmarks or from previous months or years.
If this sounds like something you’d like to explore further, I have a FREE self-assessment available. See below:
Controlling expenses is the #1 concern for dealers. Get your FREE Dealer Self-Assessment to see how you measure up against manufacturer-specific benchmarks. Get it today!