I’ve been working with a dealer client who’s number one goal is to control expenses. They reached out for help with a common challenge: despite strong sales and revenue, their profitability was suffering due to poor expense management. While they excelled at moving vehicles off the lot, they lacked the financial expertise to identify and control unnecessary spending. This knowledge gap led them to seek CFO-level guidance to better understand and optimize their operational costs.
While most automotive leaders understand the importance of cost control, many resort to indiscriminate budget cuts. However, strategic expense management requires a data-driven approach. By implementing Key Performance Indicators (KPIs), dealerships can identify precise areas for optimization, leading to more efficient operations and better financial outcomes.
While sales volume drives revenue, a dealership’s financial health depends equally on expense management. Regular monthly analysis of your financial statement reveals crucial insights about profit margins and helps ensure operating costs stay proportional to your gross profit. This balanced approach—monitoring both revenue and expenses—creates a more complete picture of your dealership’s financial performance.
By regularly monitoring the right Key Performance Indicators (KPIs), you can maintain profitability, keep costs under control, and ensure that your dealership operates efficiently.
In this post, I’ll dive into the most important KPIs you should track each month in your income statement to manage expenses effectively while keeping your dealership’s gross profit on target.
Keep in mind that every franchise is different and some have similar approaches to tracking and analyzing financial statements and some have different. But this KPI list is fairly standard and if your factory representative has benchmarks that are not included on this list, they can easily be folded into your monthly review.
Top KPIs for car dealerships to align expenses with gross profit
Important Note on Benchmarks:
The ranges provided below are general guidelines. Each manufacturer structures their financial statements differently, resulting in brand-specific benchmarks. For precise targets relevant to your dealership, consult your manufacturer representative. Need help interpreting your financial metrics? Contact me—I specialize in translating complex financial data into actionable insights.
1. Gross Profit Margin
The gross profit margin is a foundational KPI. It reflects the percentage of revenue that exceeds the cost of sales. In a dealership, this includes the costs associated with the sale of vehicles, parts, or services from manufacturers and suppliers.
- Formula: (Gross Profit / Sales) x 100 (to get the percentage)
- Why It Matters: This KPI is crucial for understanding how effectively your dealership is pricing vehicles, repair services and parts relative to their cost. A high gross profit margin indicates that you’re managing costs well and pricing competitively. Conversely, a declining margin might signal that Cost of Sale is rising or that vehicles are being sold too cheaply.
In dealerships, we track gross profit margin separately for new and used vehicles, as well as service and parts. Each department has different margin expectations or benchmarks, and these figures can vary significantly depending on factors like inventory acquisition costs and service efficiency.
Benchmarks:
- New Cars: 7-10%
- Used Cars: 12-15%
- Service & Parts: 45-55% depending on factors such as brand and the amount of wholesale business.
Why It Matters: These benchmarks help ensure that you’re pricing competitively while still covering the cost of sales. Higher margins for used cars and service indicate where more profitability can be gained.
2. Net Profit Margin
While gross profit margin gives you insight into profitability before expenses, net profit margin how the store is doing overall and it’s a metric that lenders often use when exploring funding options for the store. This KPI measures how much profit remains after all expenses have been deducted, giving you a clear picture of your dealership’s financial performance.
- Formula: (Net Profit / Sales) x 100
- Why It Matters: Net profit margin highlights the effectiveness of your overall operations, including how well you control both direct and indirect costs. It’s one of the most telling indicators of your dealership’s financial health, as it directly relates to how much profit you keep from each dollar of revenue.
A strong net profit margin reflects efficient cost control across all areas of the business, from sales to service to general administration.
Benchmark: 2-4% (for well-performing dealerships). When I was at Beverly Hills BMW, we consistently achieved 6% “net to sales,” which is a pretty great job.
Why It Matters: A strong net profit margin shows that after all expenses, your dealership is still profitable. This percentage may seem small but can lead to substantial overall profits due to the nature of high revenue in the car business.
3. Expense as a Percentage of Gross Profit (This is my #1 favorite)
Operating expenses cover all the costs required to run your dealership, including payroll, utilities, rent, and advertising. When analyzing your income statement, it’s essential to monitor these expenses as a percentage of gross profit.
- Formula: (Operating Expenses / Gross Profit) x 100
- Why It Matters: This KPI helps you understand how much of your gross profit is consumed by the costs of running the business. Keeping this percentage low is essential for maximizing the profitability of your dealership. If operating expenses grow disproportionately to gross profit, it could indicate inefficiencies in your operations or overspending.
For example, if you notice that operating expenses are taking up a larger chunk of your gross profit, it might be time to review your marketing strategies, renegotiate rent, or examine personnel costs for potential savings.
Benchmark: 75-80%
Why It Matters: This benchmark ensures that the majority of your gross profit is not being consumed by operating expenses, leaving room for a healthy net profit.
4. Fixed Absorption Rate
The fixed absorption rate is a critical KPI for car dealerships because it measures how much of your dealership’s overhead is covered by the gross profit from fixed operations, which is service, parts, and body shop activities.
- Formula: (Fixed Operations Gross Profit / Dealership Overhead) x 100.
Example:- Fixed absorption for Ford dealers: the sum of total parts, service, and body shop gross profit divided by the sum of total fixed expenses plus dealer’s salary, plus parts, mechanical, and body shop sales expenses.
- For Toyota dealers: gross profit from service, parts, and body shop divided unabsorbed expenses minus new and used sales compensation, supervision compensation and F&I commissions.
- Why It Matters: Ideally, you want your fixed absorption rate to be as close to 100% as possible. A high absorption rate indicates that your fixed operations are generating enough profit to cover the dealership’s overhead costs, reducing your reliance on vehicle sales to cover expenses.
If your fixed absorption rate is low, it’s likely time to look into increasing service appointments, selling more parts, or boosting customer loyalty through service incentives.
Benchmark: 100%
Why It Matters: A fixed absorption rate close to or above 100% means that your dealership’s service, parts, and other fixed operations are covering overhead costs, reducing dependence on vehicle sales for profitability.
5. Selling Expense as a Percentage of Gross Profit
Selling expenses include all costs related to generating vehicle sales, such as commissions, advertising, and bonuses for your sales team. Every manufacturer has their own definition of “Selling Expense” and often it’s called “Variable Expense.” Monitoring this KPI helps you keep sales expenses under control relative to gross profit.
- Formula: (Selling Expenses / Gross Profit) x 100
- Why It Matters: This KPI gives you insight into how efficiently your dealership spends money to generate sales. If selling expenses consume too much of your gross profit, you may to revisit your sales commission structures, advertising costs, policy adjustment, or promotional strategies.
Keeping selling expenses in check ensures that you’re maximizing profitability without overspending to achieve sales.
- Benchmark: 30-35%
- Why It Matters: Keeping selling expenses within this range indicates that your sales operations are efficient. Spending too much on commissions, advertising, and bonuses quickly erodes profits.
6. Personnel Expense as a Percentage of Gross Profit
Personnel expenses, including wages, benefits, and bonuses, are typically one of the largest costs for any dealership. Keeping these expenses aligned with your gross profit is essential to maintaining profitability.
- Formula: (Personnel Expenses / Gross Profit) x 100
- Why It Matters: This KPI helps you monitor labor costs and ensures that you’re getting an adequate return on investment from your employees. A high percentage could indicate that you’re overstaffed or that compensation packages need to be restructured.
Balancing payroll costs while maintaining high employee productivity is key to running a successful dealership. It’s truly on of the most challenging duties of the operation.
Benchmark: 34%-41%
Why It Matters: Personnel expenses are typically the largest cost in a dealership. Staying within this benchmark ensures that you’re not overspending on labor while maintaining effective staffing levels.
7. Advertising Expense as a Percentage of Gross Profit
Marketing and advertising is a vital part of generating leads and driving sales, but it can quickly eat into your gross profit if not managed carefully. This KPI helps you measure the efficiency of your advertising spend.
- Formula: (Advertising Expense / Gross Profit) x 100
- Why It Matters: Overspending on advertising without seeing a proportional increase in sales directly effects your bottom line. Monitoring this KPI ensures that your marketing dollars are being spent wisely and delivering a good return on investment (ROI).
If you find that advertising expenses are too high relative to gross profit, it’s likely time to reassess your merchandizing tactics, advertising channels and/or marketing strategy.
Benchmark: 7-10%
Why It Matters: Dealerships should aim to keep marketing expenses at this percentage of gross profit to ensure they’re generating leads cost-effectively. Spending more than this indicates a need for more efficient strategies.
8. Rent/Occupancy Expense as a Percentage of Gross Profit
Rent and facility costs are significant fixed expenses for most dealerships. Monitoring these costs relative to your gross profit is crucial for maintaining profitability.
- Formula: (Rent / Gross Profit) x 100
- Why It Matters: Keeping rent and occupancy costs in line with your gross profit ensures that you’re not overspending on your physical space. When your rent expenses are too high, it significantly impacts your net profit.
Sometimes, there isn’t much you can do regarding rent but other fixed costs can be examined in detail. When the time is right, explore renegotiating leases or optimizing your space usage if occupancy costs are eating into gross profit.
Benchmark: 10-12%
Why It Matters: Occupancy costs, including rent, should stay within this benchmark to prevent overhead from consuming too much gross profit. Lower occupancy expenses contribute to better overall profitability.
9. Return on Assets (ROA)
Return on assets measures how efficiently your dealership is using its assets—such as inventory, buildings, and equipment—to generate profit.
- Formula: Net Income / Total Assets
- Why It Matters: A low ROA could indicate inefficient use of resources. By tracking this KPI, you can assess whether you’re making the most of your inventory, service bays, or other dealership assets to maximize profit.
Benchmark: 5-10%
Why It Matters: A dealership with a ROA within this range is making efficient use of its assets. A higher ROA means better financial performance, as assets like inventory, buildings, and equipment are generating strong profits.
10. Return on Equity (ROE)
Return on equity is a critical measure for any business owner or investor. It shows how effectively the dealership generates profit from shareholders’ equity.
- Formula: Net Income / Equity
- Why It Matters: ROE is a key indicator of financial health and operational performance. A high ROE reflects efficient management and the ability to generate significant profit from a given level of investment.
Benchmark: 15-25%
Why It Matters: A strong ROE indicates that the dealership is providing good returns to shareholders or owners. It also shows how well equity capital is being used to generate profit.
Bonus: Break-even Analysis
At its simplest, breakeven is how much money you need to make to cover all your expenses before you start making a profit.
The dealership breakeven point is where the total revenue equals its total costs. This means the dealership has sold enough cars, service and parts to cover all its expenses, including both fixed costs (like personnel expense, rent, semi-fixed and fixed expenses) and variable costs (cost of sales, selling expenses). Beyond this point, any additional sales contribute to profit.
Understanding your dealership’s break-even point is essential for planning and profitability. This analysis helps determine how many vehicles you need to sell or how much service revenue you need to generate to cover fixed costs.
- Formula: Fixed Costs / (Gross Profit Percentage)
- Why It Matters: Break-even analysis provides insight into the minimum performance needed to avoid losses, giving you clear targets for sales and service revenue.
Benchmark: Varies by dealership size, costs, and market, but the aim should be to break even at the lowest possible sales volume while maintaining profitability. Common targets are to break even within 50-60 units per month for a medium-sized dealership.
Why It Matters: Knowing the break-even point ensures that you are aware of the minimum sales volume required to avoid losses.
Break-even Formula
The basic formula for calculating your break-even point in units is:
Break-even Units: Fixed Costs/Gross Profit per Unit (Price – Variable or Selling Cost per Unit)
Alternatively, to calculate the break-even point in dollars (revenue), the formula is:
Break-even Revenue: Fixed Costs/Gross Profit Margin Percentage
Example of Break-even Analysis
Let’s say your dealership has the following annual expenses:
- Fixed Costs: $2,000,000 (this includes personnel, rent, utilities, etc.)
- Gross Profit per Unit: $3,000 (this includes the profit from each vehicle after paying for COGS and sales commissions)
- Gross Profit Margin: 10% (for new cars)
To calculate the break-even point in units, use the formula:
Break-even Units = $2,000,000/3,000 = 667 units per year
This means you would need to sell 667 vehicles per year just to cover your fixed costs. Any sales beyond this point contribute to profit.
Alternatively, to calculate the break-even point in revenue, use the formula:
Break-even Revenue = $2,000,0000/0.10 = 20,000,000
This means your dealership needs to generate $20 million in revenue to cover your fixed costs and break even.
I’ll leave you with this
These benchmarks provide a solid foundation for tracking your dealership’s performance, identifying where expenses can be optimized, and ensuring profitability across all departments. Keep in mind that benchmarks can vary depending on location, market conditions, and the dealership’s size, but adhering to these standards will help maintain a healthy balance between revenue and expenses. If you’d like my help determining your own KPIs, please get in touch with me here.
By focusing on these KPIs and regularly analyzing your income statement, you ensure that your car dealership remains profitable and operationally efficient. Tracking expenses in relation to gross profit enables you to identify areas for improvement, optimize costs, and drive long-term success.
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