The first quarter of 2006 for most auto dealers was a struggle to say the least. Many dealers are facing reduced margins, competitive pressures and reduced traffic. While maintaining or increasing gross profits is important in today's market, expense control is the phrase of the day. Rising interest rates, increased fuel costs and skyrocketing health insurance premiums may be out of a dealer's control; however, the management of these costs along with other expense items are in your control and need to be reviewed and monitored in order to stay profitable.
The idea of expensing yourself into a profit was always thought to be the incorrect way to become profitable, however in today's market of smaller margins and greater competition it may be the only way to go.
The "Big Three" expense areas
The obvious culprits in the expense control quest are the "big three," payroll, advertising and floorplan interest. Gone are the days of negative interest expense due to wholesale credits exceeding wholesale charges. In theory, in today's rising interest rate environment, floorplan interest costs should add up to approximately 10 percent to 12 percent of total new and used car gross. If your floorplan interest is exceeding this amount your inventory management practices need to be reviewed. Now more than ever the turn of inventory is instrumental in keeping floorplan interest in check. Being selective in ordering and decisions on the wholesaling of trades are critical.
Personnel are your most valuable asset and also your most costly asset to maintain. Typically payroll and employee benefits will cost 40% to 50% of gross profit for the dealership. In order to be able to return 15 percent to 20 percent of gross profit to the bottom line, these costs must be kept in check. Pay plans should be reviewed to ensure that they are designed to fall into these guidelines and can compensate employees for strong performance but not reward them for lackluster performance.
Advertising has always been a struggle. Determining how much is too much or how little is too little has always been the million dollar question. As a rule of thumb, advertising should not exceed $300 per new and used retail unit or should cost between 10 percent and 12 percent of total gross profit. Forecasting and budgeting advertising dollars is key. Management should be given a budget based on expected sales volume and gross profit and should be held accountable to those amounts.
As you can see, the "big three" generally will cost between 60 percent and 75 percent of total gross profit, leaving only a small amount of gross to be absorbed by semi-fixed and fixed expenses. In order to return 15 percent to 20 percent of gross to the bottom line, you must be able to hold your semi- fixed and fixed expenses to 15 percent to 20 percent of your gross depending on the management of the "big three." The management of these
expenses could mean the difference between a statement in the red and a statement in the black.
30 ways to control expenses
Here are 30 ideas aimed at reducing some of these expenses and in turn retaining more gross:
1. Hold a "payables party" to review expenses
with managers / Trend all expenses and
2. Initiate or review an approved vendor list /
Limit purchase order access / Review
3. Make staff aware of expenses / Develop
"Savings Attitude" / Reward staff for expense reduction ideas
4. Eliminate all overtime
5. Charge back overtime against manager's pay
6. Shorten hourly workers hours / Maximize use
of part time employees
7. Negotiate equipment lease buyouts
8. Cut software and hardware support / Have data processing bills reviewed by consultants / Consider switch to lower cost DMS provider
9. Negotiate trash charges - larger dumpster,
10. Review shop policy expense weekly / Charge back technicians for policy work
11. Buy carpets/mats instead of renting
12. Verify uniform cancellation on terminated employees / Shop uniform contracts / Ensure
terminated employees uniforms are turned into managers
13. Initiate $100 dealer trade charge against car
14. Review telephone carrier contract and alternative suppliers / Negotiate or switch T-1 line companies
15. Install electronic thermostats / Replace electronic fixtures with energy efficient ones / Use zone heating / Upgrade insulation / Utilize waste oil heaters / Upgrade shop lighting / Lot lights automatically controlled
16. Investigate power company rebates
17. Charge deals for CRM costs
18. Raise insurance deductibles
19. Develop monthly safety meetings to reduce workers' comp premiums
20. Break out vacation, holidays and paid time off from wages to reduce workers' comp premiums
21. Bid all outside services / Shop all paper supplies / Ask for discounts from printer suppliers on letterhead and envelopes
22. Budget each technician to $50 in shop supplies per month / Technicians trade can for can to reduce supplies
23. Use prepaid shipping or vendor shipping accounts to reduce freight expenses
24. Renegotiate credit card rates / swipe cards rather than punch
25. Don't allow automatic increase or fuel surcharges on contracts
26. Cancel First Aid cabinet contracts - do not supply medications
27. Share cell phone minutes / Deduct excess cell phone minutes out of employees' pay checks / Pool cell phone minutes into one plan vs. individual minutes
28. Pack new and used vehicles to offset
policy expenses / Charge expenses to
vehicles - window stickers, Carfax, temporary tags, etc.
29. Consider switching from Muzak to XM radio
30. Reduce amount of gas put into deliveries
Expense control has always been important for auto dealers; however in today's market, expense control is critical. Manage and control your expenses and remain profitable; lose sight of expenses or allow your expenses to creep and don't be surprised when your statement shows red.
Ray Lofstrom is a principal with the dealership accounting and consulting firm of O'Connor & Drew, P.C., 1515 Hancock Street, Quincy, MA 02169. He can be contacted at (617) 471-1120.