How to Add a New Department
Diversifying your operation can bring new customers, new revenue — and new accounting concerns. The magazine’s resident number cruncher asks the tough questions.
August 2013, Auto Dealer Today - Feature
Are you thinking of adding a new department to your dealership? There are plenty of options beyond new- and used-car sales, parts and service. Dealers routinely add departments such as subprime finance, buy-here, pay-here (BHPH), leasing, body shop, rental cars, detail, quick lube, accessories and more.
If you are wondering whether you should add a new department, there are a number of questions you must consider. These questions fall into three general categories: cash flow, personnel and marketing. Let’s take a closer look at each.
1. Cash Flow
The first big question that comes to mind is whether you have the cash flow available to add a new department. Determine what the launch will cost. List the inventory and capital items such as tools, equipment, furniture, fixtures and construction or renovation costs.
Next, you must decide whether you have enough cash available to fund it yourself. If not, you will have to find a way to finance it. Of course, your costs will increase due to the interest you will pay on the loan, which leads to the second big question: How much revenue do you expect your new department to generate? Will it cover the loan payments and the interest? Even if you don’t have to borrow the funds, the new department has to outperform whatever returns you are currently making on the cash you have saved.
Space is a major concern for most new departments. Consider future space requirements today, because it may be cheaper to complete it all at one time. With that in mind, take a look at your facilities. Do you have enough space to house a new operation? How much will it cost to renovate? Is there room to expand if the department is a success? Do you have the option to rent an adjacent or nearby property?
Finally, if you’re considering adding a special finance or BHPH department, you may need to rethink your inventory. What kind of vehicles work best for those deals? If you have to stock up, what sources are available and which ones give you the best bang for your buck?
If the numbers add up, it’s time to create a budget. Bear in mind that more costs will present themselves once the new department is up and running. Advertising, additional rent, utilities, software, payroll costs, employee benefits and training are just a few examples.
You will need to create a budget by month and year for the first year and then annual budgets for the next few years. A monthly budget is required for the first year because you are not likely to start out with peak sales volume the first month. You will need to ramp up and train your personnel in the first few months, work out the kinks and make sure you have the right people in place for the department to succeed. That leads us to our second category.
One common mistake dealers make when launching a new department is to go headfirst into the project without thinking it through. Then, when it doesn’t work, the people you hired to manage the department get blamed for its failure. You can lose or demoralize some good, dependable personnel by assigning them to a doomed operation.
So let’s say you’ve answered all my cash flow concerns and you’re ready to name a new department head. You may have someone on staff whom you think can handle the job, but it might be wiser to hire from outside. Each department requires its own set of skills. How much are you willing to invest in training?
If you prefer to hire a manager with experience, there’s work to be done before you start the interview process. What qualifies a person to head your new department? Who will conduct the interview and what questions should be asked?
Whether you promote from within or hire from outside, you have to determine your new manager’s compensation. You can rely on hourly wages or a salary for some departments; others will require a pay plan. There should be enough incentives in place to properly compensate your personnel and help make sales grow each month and year.
One more note: I encourage you to get your managers and other personnel involved in the decision-making process. Involving your entire management team will go a long way toward making your new department a profit center. If they are against the idea, they will put up roadblocks, which will slow down your projected sales.
Another common mistake is failing to do market research. Are you actually filling a need in your area? Will your existing customers use the new service? This is another opportunity to get input from your managers and staff. If they think it will work, what do they think is the way to approach it? Fast and furious — a common approach among dealers — or a slow buildup?
Finally, you must study your competition. How many vendors are already offering your “new” service? Do they look like they are not only surviving but prospering? What are their prices? What kind of overhead do they have? How many people do they employ? Is there room for one more competitor in the market?
Hopefully, after the initial year of operations, your new department will be making major contributions to your bottom line. It doesn’t matter how — it could be additional net profits or helping to cover some of the variable and fixed costs generated by other departments. Either way can be a win for you. Just be sure you do your homework and think it through. If you plan and budget wisely, your chances of success are good.