Track Fixed Ops Costs for Valuable Information on Your BHPH Business
There are three things that appear to be consistent among buy here pay here dealers across the country. One, dealers are paying higher prices to buy the same types of vehicles than they paid in previous years. Two, on average, vehicles have higher mileage than in previous years. Three, dealers are traveling greater distances to acquire vehicle inventory in higher volume levels.
What impact does this have on fixed operations for a BHPH dealer? The answer requires a broader look at the options dealers have for managing their fixed operations. For the most part, the focus of fixed operations in a BHPH business is largely on reconditioning and repairs to vehicles. The biggest decision a BHPH dealer will make in this aspect of the business is whether to do reconditioning and repairs in-house or sublet the work to outside garages and repair centers. Both options have advantages and disadvantages.
The decision to do reconditioning and repairs in-house is largely driven by the investment required for equipment, tools, staff and facilities. For many BHPH dealers, the cost and space requirements of those items present a knockout punch right away. For dealers who are able to implement an in-house reconditioning and repair center, the biggest advantage they gain is control over quality and type of reconditioning and repairs that are done. By utilizing your own facilities and staff, you control many other key factors in the reconditioning and repair process including the cost of parts, labor rate, the type and extent of repairs that are done, the experience level of mechanics, and the peace of mind you get by having the work done by your own staff.
For dealers who choose to sublet reconditioning and repairs, the obvious advantage is that they don’t have the investment in facilities, equipment and staff. The tradeoff is that you have less control over the quality of reconditioning and repairs, and you must rely on the outside shops to get the work done in a timely manner. One of the key factors to success with this option is to develop good relationships with the sublet shops you use and to constantly spot-check the reconditioning and repair estimates that are prepared to ensure that the work being recommended is actually required.
Whichever format you utilize for reconditioning and repairs, the one factor that remains the same for both scenarios is the importance of accurately tracking and reporting the total cost of the work done. For example, some dealers who have their own mechanic on staff charge the mechanic’s hours to staff expense instead of charging the hours to the specific reconditioning or repair order for a specific vehicle. Posting the mechanic’s time to a specific work order may take a little longer, but the true cost of reconditioning and repairs needs to include the parts and labor charged to the specific work order. The reason for tracking parts and labor for each specific work order is to accurately report the reconditioning expense per vehicle. Monitoring the trends associated with your reconditioning expense can provide valuable insight into the cost of operating your business and the impact on profitability.
Another factor that remains the same for both reconditioning and repair scenarios is accurately tracking repairs and expenses after delivery of the vehicle. This expense is most commonly referred to as “policy expense.” If policy expense is not tracked and reported accurately, it can produce some shocking results on the profitability of your business. By accurately tracking repairs and expenses after delivery of the vehicle, you can better gauge the quality and extent of the reconditioning work being done. Under-reconditioning or poor-quality reconditioning can result in costly repairs after delivery of the vehicle, and those unexpected costs can produce a negative hit to the bottom line profitability of your BHPH business.
One of my favorite expressions is, “You can’t manage what you don’t measure!” Accurately tracking and reporting the costs associated with the fixed operations of your BHPH business will provide valuable information for managing your business. In the big picture of managing your business, accurately tracking and assessing key operational items like rate of return, total expense as a percent of gross profit and operating profit as a percent of sales are just a few of the many key drivers to profitability that successful BHPH dealers measure on a monthly basis.
In summary, as we continue to pay higher prices to buy vehicle inventory, combined with higher mileage on vehicles, we will likely see a corresponding increase in the overall cost of reconditioning and repairs on vehicles. Tracking these costs accurately, and managing the impact of these costs on your BHPH business before and after delivery of the vehicle, will become increasingly important to the overall profitability of your BHPH business.
Vol. 9, Issue 4