Volume Vs. Gross
May 2013, Auto Dealer Today - Feature
Ready to go big time? The magazine’s resident accounting expert lays out the key considerations for those who wish to become volume-unit dealers.
We review quite a few financial statements on a regular basis. The format and presentation of financial data varies from franchise to franchise. Each franchise seems to think they have the best format to inform the dealer how the business is performing.
Well, they are very different, but the basics remain the same. There is a balance sheet and an income statement. The income statement is broken up into many departments: new, used, F&I, service, parts, body shop, rental, quick lube, etc. Some statements show some of the variable expenses under the sales and gross profit area; others list the gross and all expenses separately.
It doesn’t really make much difference how these statements are formatted, as most dealers look at the bottom line on the front page and then turn to the second page to see the summary of all gross and expenses. Some even turn to the sales and gross profit pages to see if the counts seem right and if the grosses appear to be reasonable based on what type of month they think they had.
So, are you a volume-unit dealer with low to average gross- es, or are you a large grosser moving a lot less units? You could sell 100 units at an average of $1,000 gross profit on the front end, or you could sell 65 units at an average of $1,550 gross profit. Either way can get you to $100,000 in gross for the month. So, which way is better? Well, there are quite a few factors to take into consideration.
GO FOR BROKE
The first factor is the amount of inventory you are carrying and how fast you can replace it. If you want to sell 100 units per month, you had better get busy and visit the factory order bank frequently. You’ll also have to spend some time at the auctions — online and in person — to purchase enough units to keep up the sales pace you have set.
Another factor to consider is the number of employees you’ve identified to sell 50 percent more vehicles than normal each month. Can you find enough qualified individuals to staff all the needed positions, such as F&I, sales, technicians, detail, etc.? You can probably do this over time as you build up to the increased unit volume.
You also will have to increase your variable expenses considerably to fund the growth in units, such as advertising, interest, commissions and drivers, to handle the volume of increased dealer trades and picking up cars at the auctions.
More importantly, you have to be sure these expenses don’t increase disproportionately to the gross generated. Remember, to make the same net bottom line income, your costs must remain as flat as possible.
EXPANDING YOUR MARKET
Another factor to consider is your geographic area and the population around you. Can it provide enough customers to supply the sales volume you want to achieve? More and more dealers are realizing the power of the Internet and are using it to drive traffic to their store at a lower cost than the older, more traditional advertising mediums like print, cable, TV and mailers. It’s not that these methods of advertising don’t work, it’s that they may not work as well as they have in the past.
For example, I don’t know very many people under the age of 45 who read a newspaper. The more preferable method is to view everything online. People also are spending their time in front of a computer, a TV or listening to the radio while driving. And with the increased use and decreasing cost of smartphones, the computer has become very portable.
The one downside to being a volume dealer is that you leave your operation vulnerable to economic downturns. When the next recession strikes and sales nosedive, you will most likely be left with a higher than normal overhead structure, which can totally destroy your bottom line. And it can be very hard to shrink down to a workable overhead factor quickly enough, as many dealers have discovered.
Now, everyone hopes this never happens, but it has in the past and will again in the future. So you might want to consult your crystal ball to give you enough advance notice. My crystal ball is still on backorder.
HAVE A BACKUP PLAN
So, does it make sense to work almost twice as hard to generate the same gross profit? There are many ways to make money in this business and it seems there is not a one-size-fits-all method of doing so. If you want to increase your unit sales, start researching dealers you know who have increased their volume considerably. Document their advertising, how many and what type of vehicles they are carrying, how many conventional vs. Internet sales they have, how far away their customers are driving and how many employees they need to do it.
Remember, ramping up the volume is only the first part of the plan. You also must figure out how to decrease your overhead expense and become more efficient so there’s a plan in place when the economy tanks. You must also be sure you don’t increase your fixed expenses too much and keep your variable expenses in proportion to the gross you are generating. Complete a projection of what your grosses and financial statements will look like as your unit volume increases at various stages.
The experts say vehicle sales will increase this year as we plod along in this economy. Hopefully the worst is behind us, but we don’t want to forget the past, revert to our old management style and not be aware of what is happening around us. We need to constantly keep accepting change in our dealerships and moving forward to ensure we are never at the end of the race, because the race for better profits and better life never ends. Until next time, take care and sell, sell, sell!