Accounting Test: Keeping Internet Departments Honest
October 2013, Auto Dealer Today - Feature
Your website provider should be able to provide you with a monthly report that lists the number of hits your site has garnered, the sources of those hits, how long the average visitor spends on your site and what they are visiting on your page.
Most dealerships now have an Internet department. Some stores have gone full speed by appointing an Internet manager, hiring representatives to follow up on leads and creating an advertising budget. Other stores have approached the digital age more cautiously, just dipping their toes into the vast pool of online media.
I visit dealerships across the country, and there seems to be no similarity at all in how Internet sales are handled and accounted for. Some dealers think they are maximizing their online sales revenue just by answering every e-mail and chat request.
There is a lot more to it. It just depends on how much money, time and resources you are willing to commit to the project. Full speed or not, from an accounting standpoint, it may make sense to set up a separate department to manage the income and expenses you derive from online sales. Here’s a six-step plan:
1. Hack Your DMS
It should be very simple to set up a new department on your dealer management system (DMS). Assign your new department a number and name, set up income and expense accounts and assign them a factory financial statement line number so they show up on your monthly financial statements. This step forces you to decide how you are going to track your Internet sales, as most factory charts of accounts don’t have separate accounts set up for Internet sales, cost of sales and expenses.
2. Track Your Sales
To properly track your Internet sales, you must set up separate sales and cost-of-sales accounts for each model of new vehicles you sell. Do this for your used inventory as well. If you don’t track these sales, cost of sales and gross profits separately — whether on a spreadsheet or in your accounting software — so you can subtract them from your financial statements, you will probably not have a clue if the money you are spending for this department is worth it.
3. Establish Your Structure
Decide whether your Internet personnel should handle the lead all the way to the finish line or hand the lead over to one of your regular salespeople. If it changes hands, you have to decide how you want to record the deal on your books. If not, note each Internet sale on the deal jacket so accounting knows which sales account to record it in, where to post the commission and where to list other costs associated with the sale.
4. Separate Your YTD Expenses
Once you have the department and the general ledger accounts set up, you can move the year-to-date (YTD) expenses from the accounts you have posted transactions to all year to the new accounts. That will allow you to start your department analysis in the current month.
Once you begin posting the sales and cost-of-sales accounts separately, you can easily see whether your Internet department is profitable. Make sure you allocate the correct payroll costs for the personnel working in this department. It should be based on the percentage of time they are spending there. Now you can calculate the average gross profit per unit sold, the commission or cost to sell it, and the variable expenses associated with it — the same as you would with your new- and used-vehicle departments.
Make sure you have set up accounts for Internet-centric expenses such as website design, in-store Internet usage, monthly web hosting maintenance fees, search engine optimization and lead-management software costs, not to mention your manager and sales representatives’ salaries and commissions.
5. Separate Your Fixed Expenses
If you really want to do it right, you should be allocating some of your semi-fixed and fixed expenses to the Internet department. How much is up to you. This can be a real pain to analyze and allocate, so you may want to have the department up and running for a while before you take this step. Your office manager or accounts payable expert can probably tell you which expenses pertain to your new department.
For the most part, your largest expenses are going to be personnel and electronic media software and usage fees for each click, etc. These are the ones you need to pay the most attention to, as they are variable and controllable costs. If the cost of each sale is larger than the revenue you are generating, you will need to decide how to drive more people to your site that may buy, or start reducing some expenses so the department is not a drain on your dealership’s profits.
6. Order Your Reports
The profitability of any department depends on performance. Your Internet manager should track how long it takes to respond to a lead and how many leads are closing as actual sales. Your website provider should be able to provide him or her with a monthly report that lists the number of hits, the source (e.g., Google search terms), how long the average visitor spends on your site and whether they are visiting different departments.
With the right information at hand, you should be able to compute your cost for each lead and unit sale. Better yet, you can make intelligent decisions on how to improve your website, your inventory mix and your process for handling Internet leads.
Once you have set up new accounts for the income and expenses generated by your Internet department, you can determine whether the department is profitable. If it isn’t, you need to act fast. Look at your site from the perspective of a potential customer and ask yourself the following questions:
- Is your site graphically appealing and easy to navigate?
- Does it look as nice as your competitors’ sites?
- Is your inventory easy to find?
- Are your vehicles listed with good photos, videos and descriptions?
- Are your online prices competitive for your market?
- Do you know how many of the same vehicles are for sale in your market area?
- Do you make it easy for customers to contact you?
David Keller is a partner with CliftonLarsonAllen, a Top 10 nationwide accounting firm with extensive experience in serving new- and used-vehicle retailers, heavy truck and utility trailer outlets, and BHPH dealerships.