May 2010, Auto Dealer Today - WebXclusive
Review your year-to-date income statement as compared to the prior year, specifically whether vehicle gross profit percentages remained consistent or were lower than the prior year. If they’re lower, you should review individual vehicle sales and associated cost-of-sales accounts to find out which product generated the lower-than-normal gross profit percentage and reduced your overall gross profit.
If you are not tracking the various types of vehicle sales and cost of sales separately, it could be hard to find the problem. One way to find the problem is to print a report of all individual sales transactions and review which sales are lower than normal. If the report doesn’t give you the gross profit percentages, see if you can export the report to a spreadsheet where you can calculate the gross profit percentage yourself.
Once you have found the problem sales, pull the car deals to review why the gross profit was low. It could be a number of things, such as higher-than-normal reconditioning expense, misclassification of expenses, old age units you reduced, etc. After classifying the problem deals, you will know what you have to correct. It could be as simple as better inventory management to reduce over-age units or monitoring your reconditioning process more closely.
If you have a service department, body shop and/or a parts department, you can complete the same process as above to also find the problem repair orders or parts tickets. If you have a software system that allows you to schedule your accounts in a side-by-side format, you can set up a new report as a balance-forward format scheduled by repair order number and/or parts ticket number. For example, you would have the customer-labor sales and cost-of-sales accounts and the customer-parts sales and cost-of-sales accounts on the same schedule.
Each control number in the schedule would be the gross profit of the entire customer repair labor and parts ticket. Most systems allow you to export or copy the schedule to a spreadsheet where you can add columns to calculate the gross profit percentages for labor sales, parts sales and the total ticket. You can then sort the data by lowest to highest gross profit percentage first by the labor sales, then by the parts sales and then by the total ticket sales. This will put all the problem tickets together and make the data easier to review. You can then pull the tickets for review to find why they are low. You can also use this method for vehicle sales, cost of sales and reconditioning expense accounts on the same schedule.
If your software system reports or data exports don’t allow you to either schedule the accounts or copy the data to a spreadsheet, contact your software vendor to see if a custom report can be set up to easily give you this information. Again, if you are not tracking individual sales accounts with matching cost-of-sales accounts, find out if it is possible on your software system. Call your vendor to find out if you are processing the information in your system incorrectly or if it is even possible to match up the sales and cost of sales by changing the setups in the system and retraining your personnel to record future transactions correctly.
Next, review your expenses as a percentage of gross profit and/or sales, whichever is more appropriate for your company. Review your chart of accounts to find out if your expenses are separated correctly into variable and fixed expenses. Variable expenses are only incurred only if your sales increase or decrease based on your sales volume and include sales personnel, sales management, employee benefits, advertising, delivery expense, etc. Fixed expenses include rent, utilities, general liability insurance, administrative salaries, repairs, etc., which are not normally affected by the amount of sales you record. There may also be some semi-fixed expenses that do change somewhat based on sales volume, but also have a fixed characteristic.
If your software allows you to print an income statement with expenses as percentages of sales or gross profits, you can more easily review this year versus the prior year. Some expense percentages can look out-of-line if sales are either abnormally low or high in relation to the dollar amount of expense incurred. The expense dollar amount may be correct and be as low as you can achieve and still remain in business. This could be a semi-fixed or fixed expense that may not be impacted by sales until it reaches a specific level. If possible, try to put each month of the current and prior years side-by-side, so you can easily see the variances month by month. The problems will stand out and be more easily found compared to just looking at one or two months of one year to the prior year.
When reviewing all of the above, keep in mind the changes in the economy from one year to another. Try to document why sales, gross profit percentages and expenses ended up the way they did. Don’t guess, but do your homework and really find the reason. Once you discover the problem, start preparing the scenario for the current year so you achieve your set goals by year-end. Communicate these goals to all your managers and employees so everyone is aware of what you want to accomplish. If you don’t communicate in detail with the people responsible, don’t expect different results.
Vol. 7, Issue 3