Article

Identify Savings in These Dealership Operations

August 2011, Auto Dealer Today - WebXclusive

by David Keller, CPA, CFE - Also by this author


There are many different types of car dealerships, and while everyone runs their business differently, basic principles of business can be applied to all dealerships.

One of the critical items your dealership can’t do without is a credit card machine. You also have a merchant account where all the credit card activity is processed. When is the last time you reviewed the processing fee rates charged on the various type of cards? Different cards have different rates and different merchant account providers offer various rates. If you haven’t reviewed your volume of transactions lately and checked to see what options and rates are available in the marketplace, then it is time you do. You may be surprised at the volume of activity and the average monthly fees you are paying.

I am conducting a survey of credit card fees incurred by dealers. If you would like to complete the survey, please contact me at [email protected] and I will share the results of the survey with you when completed.

Your uniform contracts should also be reviewed on an annual basis. There may be other options out there now that were not available a year ago. Review your contract and compare it to a recent invoice. Do they agree? How long is the contract for? Are there price increases built into the contract? Can you renegotiate or terminate it at any time?

Have you reviewed your packs lately? Whenever I ask dealers what their pack is, it ranges from a few hundred to a few thousand for stores with the same franchise and similar in size. How can this be? If one dealer can get the same commissionable gross profit with a higher pack, why can’t another dealer achieve the same result?

Some dealers have both soft and hard packs. Soft packs are packs just for commissionable gross profit purposes. They are normally entered in the F&I screens and do not affect the true cost of the vehicle. Hard packs are actually journal entries posted to increase the inventory cost of the vehicle. The gross profit based on a hard-packed cost normally generates a higher overall gross profit. The reason why is because the offset to a hard pack normally increases profit up front of the sale by reducing an expense or increasing a reserve account balance to be used in the future for increased profits to be shown.

Many of our dealers have charged the vehicles with a hard-gas pack that is used to offset the high cost of gasoline these days. If your gas pack is less than $75, you may want to consider raising it to $100 to cover the $4-per-gallon or higher gas we are already experiencing. A great way to check this is to review your total gas bill and see if the current gas packs are offsetting the total average monthly cost based on the amount of units you are stocking and selling. Most of my dealers started out years ago at $40 and have moved it up over the years to at least $100 currently.

Check on your service setups too. One of the items to check is your materials/environmental charge, the percentage of labor you are using as a rate and your maximum amount charged per repair order. Most of these setups have not been reviewed for a long time and are not where they should be to cover environmental and other costs you are incurring each month. Check with your state auto dealer association for any maximum charges or other criteria which may be a law within your state. You can also check the pay rates for each technician to determine how accurate it is when compared against actual wages earned, pay rates used for incentives and bonuses paid for producing flat-rate hours over the actual hours worked.

In the parts department, you may want to check the gross profit markup percentages currently in use. These can be checked very easily with your parts manager. Review your gross profit percentages on your financial statement first. If they appear to be low year-to-date, then you should increase the markup percentage of those types of parts, whether it is wholesale, counter retail, customer pay, accessories, etc.

The parts department works off of markup percentages, which do not equal gross profit percentages. An example of this is a markup of 25 percent will result in a gross profit of 20 percent on your factory financial statement. A markup of 67 percent will result in a gross profit of 40 percent. As you can see, you have to exponentially increase the markup percentage to achieve the higher gross profits.

If you are utilizing an offshore reinsurance company for service contracts, credit life, collateral protection, etc., make sure your F&I department is following your guidelines on which contract provider they should be offering for sale. I still see some F&I personnel selling the factory warranty or another vendor’s product when they should be selling your reinsurance company’s policy instead. Also review the costs of the plans and the warranty coverage for each to make sure they make sense based on your claim experience.

In your accounting office, sit down with your office manager on a regular basis and choose various expense accounts to review for accuracy, total cost per month, one-time expenses incurred, etc. Even if the expenses are comparable to prior months, they still should be reviewed for accuracy from time to time.

I find if the expense amount becomes a standard amount, less attention is normally paid to it. If the same error is repeated monthly, then it can still look reasonable unless it is reviewed for accuracy. Review how the accounting office is receiving the paperwork from the other departments and what hassles (if any) the accounting staff has with the quality of the car deals, account payable or parts bills they record on a daily basis.

I have covered some fairly basic items and procedures you should understand and review from time to time. Now it is up to you to take a few minutes or hours on a regular basis to check on the status of them. There are many more, but these are some of the basics which can cost you money and additional grief from time to time.

Vol. 8, Issue 6

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