Professional Documents
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ESSENTIALS OF
Dealership Profitability
Financial Metrics
and Analysis
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This profitability improvement work aid was designed by Plante & Morans
auto dealership industry consultants to be used as a handy reference guide
by dealers and their management teams. The work aid serves as a refresher
on typical dealership cost structures and provides valuable insights with
respect to the following topics:
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At Plante & Moran, we strive to assist our clients in being vigilant in the
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the contents of this work aid are not revolutionary in nature, they serve as a
good reminder to any reader of the basics involved in making money in the
car business
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please do not hesitate to contact Jim Eagan at 248.223.3257 or
jim.eagan@plantemoran.com.
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A worthy goal of any profit optimizing dealership would be to maintain a
net profit level of 10 percent to 20 percent or higher of total dealership
gross profit. To get there, dealership management needs to implement an
appropriate cost structure based on the activity volumes in each department
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format of cost structure relationships to total dealership gross, which will
deliver the desired results.
Used
Vehicle
Service
Parts
Body
Shop
Total
Sales
$$$$$$
$$$$$$
$$$$$$
$$$$$$
$$$$$$
$$$$$$
Cost of Sales
($$$$$)
($$$$$)
($$$$$)
($$$$$)
($$$$$)
($$$$$)
100%
100%
100%
100%
100%
100%
(50%)
(50%)
(50%)
(50%)
(50%)
(50%)
50%
50%
50%
50%
50%
50%
Gross Profit
Selling
Expenses
Selling Gross
Fixed Expenses
Operating
Profit (Loss)
Other Income
(Expense)
Net Income
(Loss)
30% 40%
10% 20%
10% 20%
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FIXED OVERHEAD
New
Vehicle
Sales
Cost of Sales
Gross Profit
Variable
Selling
Expenses
Personnel
Expenses
Semi-Fixed
Expenses
Fixed
Expenses
Operating
Profit (Loss)
Net Additions
(Deductions)
Bonus
Expenses
Income Taxes
Net Profit
(Loss)
Used
Vehicle
Lease
and
Rental
Mechanical
Body
Shop
Parts and
Accessories
Total
$$$$$$
$$$$$$
$$$$$$
$$$$$$
$$$$$$
$$$$$$
$$$$$$
($$$$$)
($$$$$)
($$$$$)
($$$$$)
($$$$$)
($$$$$)
($$$$$)
100%
100%
100%
100%
100%
100%
100%
(19%24%) (19%24%)
(9%12%)
N/A
N/A
N/A
(10%15%)
(45%50%) (45%50%)
(45%50%) (35%45%)
(15%20%) (15%20%)
(15%20%) (20%30%)
(15%20%) (15%20%)
(15%20%) (10%20%)
(10%15%)
10%15%
10%15%
15%20%
15%20%
15%20%
15%20%
5%10%
$$$$
$$$$
10%20%
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Professional fees
Telephone
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Other interest
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Fixed expenses
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Mortgage interest
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Insight: Be cognizant of any non-arms-length amounts affecting rent,
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validated our hypothesis with two of the domestic big three manufacturers,
that a well managed profit minded domestic dealership will generate $6,500
or higher of average gross profit per employee per month. This financial
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mean the dealership is giving up its gold.
For any dealership, the average gross profit generated per employee, per
month, is an extremely important profitability metric.
If the average is low (less than $6,500 per month) this could be indicative of the dealership having too many employees.
If the average is more than $6,500 per month, then the dealerships
head count is probably about where it should be for the gross being
generated in the dealership.
Computation (Direct Method):
Step 1: 1fW4\b=dX\i7b_cc-ID44UQ\UbcXY`7b_cc No. Months
Step 2: 1fW7b_cc@Ub5]`@Ub=_^dX-1fW=dX\i7b_cc No. Emps.
Insights:
1. More profitable dealerships typically have an average gross profit per
employee, per month, of close to $7,000 or higher.
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lower metrics.
It is also possible to perform an indirect computation to arrive at a
target number of employees, given the dealership gross levels.
Computation (Indirect Method):
Step 1: DQbWUd>__V5]`\_iUUc-1fW=dX\i7b_cc $6,500
Step 2: @_ccYR\U5hSUcc5]`\_iUUc-1SdeQ\8UQT3_e^dDQbWUd
No. of Employees
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11
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It is fairly easy to prepare on a pro forma basis what the financial results
of a dealership will be if no changes are made to a dealerships cost
structure during economically challenging times.
(E-mail jim.eagan@plantemoran.com for a complimentary analysis
template spreadsheet)
Once the above pro forma is prepared, it is very beneficial to consider
various alternative cost-reduction strategies, the source of which should
be apparent from the profitability analysis performed with respect to:
Employment costs (head count, pay plans, fringes)
Advertising expenses
Floor plan expenses
Nice to Have versus Must Have expense analysis
Frequently, there is no one way of walking to improved profits. The specific
strategies are ultimately up to each individual dealer.
12
13
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Effective pay plans may:
Cause an individual to be highly motivated to perform tasks that, if done
right, will enhance his or her own financial success and that of the entire
dealership.
Result in a fair overall compensation paid to the individual based on their
economic worth in the marketplace.
Do not reward those who are riding the wake of others.
Incorporate specific performance expectations and reward their achievement and/or penalize the lack thereof.
Reward an individual fairly for what you want them to accomplish, not
necessarily based on what they say they need.
Reflect your overall management philosophy.
Be understood by all parties and documented in personnel files.
Be reviewed at least annually for effectiveness; this review should
consider both individual and dealership performance expectations
and results.
Too often dealers changing their pay plans act impulsively, sometimes out of
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think things through, perform competitive market analysis, and perform pro
forma analysis of the what ifs usually have great results.
14
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Keep it simple and, if you can avoid it, dont change pay plans frequently.
(Weve witnessed many examples where complex and ever-changing pay
plans lead to low employee morale and motivation, higher turnover, and
cheating.)
The pay plans must deliver a dealership compensation cost structure
which, when applied to departmental gross profit levels, leaves a
reasonable and satisfactory net profit and return on investment levels
for the dealership owners.
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Financial Statement
Services
Tax Filing
Compliance &
Accounting Support
Estate Planning
Investment/Portfolio
Analysis
LIFO Inventory
Computations
Income Tax
Reduction &
Preparation
Retirement Planning
Life Insurance
Analysis
Cost Segregation
Studies & Tax
Depreciation Planning
Business Succession
Planning
Global Services
Accounting &
Internal Control
Design
Forecasting &
What If Anaysis
Profitability
Improvement
Financial Metric
Analysis
Pay Plan
Optimization
Analysis
CORPORATE
REAL ESTATE
HUMAN CAPITAL
MANAGEMENT &
DEVELOPMENT
TECHNOLOGY
CONSULTING &
SOLUTIONS
Information Systems
Selection and
Implementation
System Security
Reviews
Hardware Analysis
SAS 70 Reviews
LANs/WANs
Employee Benefits
Cost Savings
Analysis
Compensation
Analysis
Deferred
Compensation
Plan Strategies
Personnel Testing
401(k) Performance
Analysis/Consulting
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Lease Negotiation
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269.567.4500
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586.416.4900
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269.982.8000
C_edXVYU\T5QcdGUcd
248.352.2500
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231.947.7800
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VISIT plantemoran.com
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