P L A NTE & M O R A N
ESSENTIALS OF
Dealership Profitability
Financial Metrics
and Analysis
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This profitability improvement work aid was designed by Plante & Moran’s
auto dealership industry consultants to be used as a handy reference guide
by dealers and their management teams. The work aid serves as a refresher
on typical dealership cost structures and provides valuable insights with
respect to the following topics:
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At Plante & Moran, we strive to assist our clients in being vigilant in the
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the contents of this work aid are not revolutionary in nature, they serve as a
good reminder to any reader of the “basics” involved in making money in the
“car business”
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please do not hesitate to contact Jim Eagan at 248.223.3257 or
jim.eagan@plantemoran.com.
1
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A worthy goal of any profit optimizing dealership would be to maintain a
net profit level of 10 percent to 20 percent or higher of total dealership
gross profit. To get there, dealership management needs to implement an
appropriate cost structure based on the activity volumes in each department
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3Xbic\UbQ^T6_bTVY^Q^SYQ\cdQdU]U^dV_b]QdcQ^TY^dXU7U^UbQ\=_d_bc
format of cost structure relationships to total dealership gross, which will
deliver the desired results.
CHRYSLER AND FORD FINANCIAL STATEMENT FORMAT
New
Vehicle
Used
Vehicle
Service
Parts
Body
Shop
Total
Sales
$$$$$$
$$$$$$
$$$$$$
$$$$$$
$$$$$$
$$$$$$
Cost of Sales
($$$$$)
($$$$$)
($$$$$)
($$$$$)
($$$$$)
($$$$$)
100%
100%
100%
100%
100%
100%
(50%)
(50%)
(50%)
(50%)
(50%)
(50%)
50%
50%
50%
50%
50%
50%
Gross Profit
Selling
Expenses
Selling Gross
Fixed Expenses
Operating
Profit (Loss)
Other Income
(Expense)
Net Income
(Loss)
30% – 40%
10% – 20%
–
10% – 20%
“ Elements of Dealership Cost Structure (Chrysler and Ford):
“Cost of sales
“Selling expenses
Sales commissions and salaries
Advertising and promotion
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Training
Predelivery
Policy adjustments
“Fixed expenses
“ Insight: Be cognizant of any non-arms-length amounts affecting rent,
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2
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GENERAL MOTORS FINANCIAL STATEMENT FORMAT
FIXED OVERHEAD
New
Vehicle
Sales
Cost of Sales
Gross Profit
Variable
Selling
Expenses
Personnel
Expenses
Semi-Fixed
Expenses
Fixed
Expenses
Operating
Profit (Loss)
Net Additions
(Deductions)
Bonus
Expenses
Income Taxes
Net Profit
(Loss)
Used
Vehicle
Lease
and
Rental
Mechanical
Body
Shop
Parts and
Accessories
Total
$$$$$$
$$$$$$
$$$$$$
$$$$$$
$$$$$$
$$$$$$
$$$$$$
($$$$$)
($$$$$)
($$$$$)
($$$$$)
($$$$$)
($$$$$)
($$$$$)
100%
100%
100%
100%
100%
100%
100%
(19%–24%) (19%–24%)
(9%–12%)
N/A
N/A
N/A
(10%–15%)
(25%–35%) (25%–30%) (25%–30%)
(45%–50%) (45%–50%)
(45%–50%) (35%–45%)
(25%–30%) (25%–30%) (25%–30%)
(15%–20%) (15%–20%)
(15%–20%) (20%–30%)
(10%–15%) (10%–15%) (10%–15%)
(15%–20%) (15%–20%)
(15%–20%) (10%–20%)
(10%–15%)
10%–15%
10%–15%
15%–20%
15%–20%
15%–20%
15%–20%
5%–10%
$$$$
$$$$
10%–20%
“ Elements of Dealership Cost Structure (GM):
“Cost of sales
“Variable selling expenses
Sales commissions and salaries
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Policy adjustments
“Personnel expenses
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Other salaries and wages
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Employee benefits
Retirement benefits
“Semi-fixed expenses
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Supplies
Advertising
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Travel and entertainment
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Professional fees
Telephone
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Other interest
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“Fixed expenses
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Mortgage interest
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“ Insight: Be cognizant of any non-arm’s-length amounts affecting rent,
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4
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validated our hypothesis with two of the domestic big three manufacturers,
that a well managed profit minded domestic dealership will generate $6,500
or higher of average gross profit per employee per month. This financial
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mean the dealership is giving up its gold.
“ For any dealership, the average gross profit generated per employee, per
month, is an extremely important profitability metric.
“If the average is low (less than $6,500 per month) this could be indicative of the dealership having too many employees.
“If the average is more than $6,500 per month, then the dealership’s
head count is probably about where it should be for the gross being
generated in the dealership.
“ Computation (Direct Method):
“Step 1: 1fW4\b=dX\i7b_cc-ID44UQ\UbcXY`7b_cc÷ No. Months
“Step 2: 1fW7b_cc@Ub5]`@Ub=_^dX-1fW=dX\i7b_cc÷ No. Emps.
“ Insights:
1. More profitable dealerships typically have an average gross profit per
employee, per month, of close to $7,000 or higher.
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lower metrics.
“ It is also possible to perform an indirect computation to arrive at a
target number of employees, given the dealership gross levels.
“ Computation (Indirect Method):
“Step 1: DQbWUd>__V5]`\_iUUc-1fW=dX\i7b_cc ÷ $6,500
“Step 2: @_ccYR\U5hSUcc5]`\_iUUc-1SdeQ\8UQT3_e^d°DQbWUd
No. of Employees
5
Gross/Employee Productivity Metrics (continued)
“ Insights:
“ Utilization of the indirect method can be very helpful in pointing out the
extent of possible head count reductions that may be necessary.
“ Indirect Method:
“Step 1: DQbWUd>__V5]`\_iUUc-1fW=dX\i7b_cc÷ $6,500
“Step 2: @_ccYR\U5hSUcc5]`\_iUUc-1SdeQ\8UQT3_e^d°DQbWUd
No. of Employees
Goal: 3\_cU1\YW^]U^d_VDQbWUdQ^T1SdeQ\8UQT3_e^dc
6
Gross/Employee Productivity Metrics (continued)
“ Examples: Assumptions
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“Step 2: 1fW7b_cc@Ub5]`\_iUU@Ub=_^dX-1fW=dX\i7b_cc ÷ No. of
Employees
“ Direct Method:
“Step 1: 1fW4\b=dX\i7b_cc-ID44UQ\UbcXY`7b_cc÷ No. Months
“Step 1: ######$ ÷ !"
“Step 2: 1fW7b_cc@Ub5]`@Ub=_^dX-1fW=dX\i7b_cc÷ No. Emp.
“Step 2: $'&!######÷' “ Examples:
“Assumed facts:
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4UQ\UbcXY`8UQT3_e^d-'
“Step 2: 1fW7b_cc@Ub5]`\_iUU@Ub=_^dX-1fW=dX\i7b_cc ÷ No. of
Employees
“ 9^TYbUSd=UdX_T*
“Step 1: DQbWUd>__V5]`\_iUUc-1fW=dX\i7b_cc÷ $6,500
“Step 1: %!######÷ &% “Step 2: @_ccYR\U5hSUcc5]`\_iUUc-1SdeQ\8UQT°DQbWUd>__V5]`
“Step 2: !)' °%!
1^iQ^Q\icYc_VWb_ccU]`\_iUU`b_TeSdYfYdi]UdbYSc]ecdS_^cYTUbdXQdUfU^
with the right head count, if the compensation paid to these employees is too
generous, given their performance and local market conditions, the dealership
will not optimize it’s profit potential.
7
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9VdXUTUQ\UbYcdXU_^\i_^Unot smiling when paychecks are being handed
out, chances are very likely that the dealership has a compensation problem.
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have too many employees, overpaid employees for what they contribute, poor
`UbV_b]Y^WU]`\_iUUc_bc_]U]YhdebU_VQ\\dXbUUC_bdY^WdXYc_edQ^T`UbYodically revalidating that what you think is optimal is highly recommended.
To accomplish this we recommend the following:
“ Review gross/employee productivity metrics
“ Multiyear Departmental Form W-2 comparative analysis
(E-mail jim.eagan@plantemoran.com for a complimentary analysis
template spreadsheet)
“ Complete a performance assessment of all employees: Rank employees
in the same department by strength of performance on a scale from
strongest to weakest. Then divide them into three tiers.
“ Assign employees into the “Nice to Have” and “Must Have” categories
“ Insight: Once the above information is assembled, it serves as a
powerful motivating tool for adjusting employment cost.
8
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ceVVYSYU^d\UfU\cd_RbY^WY^dXUSecd_]UbdbQVVYSd_i_ebcd_bUUhSUccYfUQ^T
ineffective advertising dollars being throw at problems in the hope that t
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TUQ\UbcXY`cGXU^VQSUTgYdXfUXYS\UY^fU^d_bi_bTUbY^W]YcdQ[UcdXUcU
Uh`U^cUcSQ^XUYWXdU^Y^dXUaeUcdd_bYTdXUTUQ\UbcXY`_Ve^gQ^dUT
Y^fU^d_biGXU^dXYcXQ``U^cQcUbY_ecdXbUQdd_TUQ\UbcXY`^Ud`b_VYdc
_SSebc9^dXUcUY^cdQ^SUcYdYcY]`_bdQ^dd_S_^cYTUbdXUV_\\_gY^WgYcT_]c*
“ 50% Rule — 9dYccQYTdXQdXQ\V_VgXQdYcc`U^d_^QTfUbdYcY^WYcgQcdUT
The difficulty is that it is hard to tell which half is the
wasteful half.
“ The Fishing Rule — 9VdXUVYcXQbU^µdRYdY^WgXigQcdUdXURQYd/
“ Advertising expense is frequently a big dollar category of cost which
may or may not have direct linkage to gross generation.
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]_^dXY^QTfUbdYcY^Wi_e]ecdQc[i_ebcU\V²1bUdXUcUUh`U^cUcbUQ\\i
^USUccQbi/³
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head count.
“Avoid the temptation to advertise your way out of inventory problems.
“ You cannot spend advertising money that you don’t have.
9
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costs and rises dramatically when vehicle inventories are not turning rapidly.
8_gT_i_e]Y^Y]YjUdXUReb^Vb_]V\__b`\Q^Y^dUbUcd/
“ It costs the dealer, on average, $200 per vehicle, per month, in interest
expense for all vehicles more than 45 days old.
“4UdUb]Y^UdXU]_^dX\iV\__b`\Q^Y^dUbUcdUh`U^cUV_bQWUTe^Ydc]_bU
dXQ^$%TQicQ^TecUdXYcY^V_b]QdY_^d_TUdUb]Y^UQ^ic`USYQ\`bYSY^W_b
in-store incentive and promotion programs to move these units. The floor
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“ Inventory ordering mistakes are commonly the cause of dealers having
aged vehicle inventory problems.
“The number of individuals authorized to order inventory should be limited
to responsible managers, and their pay plans should have features to
penalize them for mistakes.
“ Ideally, a dealership should carry an approximate 45- to 60-day supply of
new vehicle inventory.
10
7 5 D D 9 > 7 1 8 1 > 4 <5 ? > 4 5 1 <5 B C 8 9 @ 5 H @ 5 > C 5 C
“ A dealer should be well aware of what types and amounts are being spent
for dealership purchases.
“ Preferably, purchases should be controlled at least at the department
manager level and, optimally, centralized with one person.
“ Profit-minded dealers carefully analyze all dealership purchases and
place their annual costs on a “Nice to Have” or “Must Have” list.
“Dealership data processing reports can print off every expense category.
It is recommended that a dealer have these printouts reviewed by managers with the goal of having them identify “Nice to Haves” versus “Must
Have” items. After this manager review, the dealer should make the final
determination.
“ A good way to get a handle on departmental purchases is to have a
departmental mangers’ check signing party
“Some dealers each week bring into a room, all departmental managers
and quiz them as the dealer signs vendor checks.
“A strong message is conveyed to the managers to think twice before
spending because they may be in the hot seat at the next party.
11
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“ It is fairly easy to prepare on a pro forma basis what the financial results
of a dealership will be if no changes are made to a dealership’s cost
structure during economically challenging times.
(E-mail jim.eagan@plantemoran.com for a complimentary analysis
template spreadsheet)
“ Once the above pro forma is prepared, it is very beneficial to consider
various alternative cost-reduction strategies, the source of which should
be apparent from the profitability analysis performed with respect to:
“Employment costs (head count, pay plans, fringes)
“Advertising expenses
“Floor plan expenses
““Nice to Have” versus “Must Have” expense analysis
“ Frequently, there is no one way of walking to improved profits. The specific
strategies are ultimately up to each individual dealer.
12
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9^Q\]_cdQ\\SQcUci_e^UUTd_RU`bU`QbUTV_bTU`Qbd]U^dQ\]Q^QWUb
resistance to change. The degree of this resistance may or may not have any
bearing on how desperate the financial condition of the dealership is.
9VdXUTUQ\UbcXY`Yc\_cY^W]_^UiQ^TReb^Y^WdXb_eWXYdcUaeYdiYdYc
worthwhile for a dealer to estimate how many months are left, assuming
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possibly very sobering, doing these types of computations is highly motivating to act before it becomes too late.
@beTU^dTUQ\UbcgY\\bUS_W^YjUX_gebWU^dYdYcd_dQ[UQSdY_^4UQ\UbcgX_
are deficient in their business skills are the ones who will tend to be frozen,
delay, or not implement changes.
Sometimes dealers just need someone to give them permission to make the
changes that are necessary. As strange as it may seem, we have even had
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instincts tell them to do. That little voice in your head is all the permission
dXQdi_e^UUT9Vi_eQbUcdY\\e^cebU_VgXQdd_T_gUU^S_ebQWUi_ed_
please contact one of Plante & Moran’s auto dealership industry consultants.
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13
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Effective pay plans may:
“ Cause an individual to be highly motivated to perform tasks that, if done
right, will enhance his or her own financial success and that of the entire
dealership.
“ Result in a fair overall compensation paid to the individual based on their
economic worth in the marketplace.
“ Do not reward those who are riding the wake of others.
“ Incorporate specific performance expectations and reward their achievement and/or penalize the lack thereof.
“ Reward an individual fairly for what you want them to accomplish, not
necessarily based on what they say they need.
“ Reflect your overall management philosophy.
“ Be understood by all parties and documented in personnel files.
“ Be reviewed at least annually for effectiveness; this review should
consider both individual and dealership performance expectations
and results.
Too often dealers changing their pay plans act impulsively, sometimes out of
TUc`UbQdY_^Q^TU^Te`]Q[Y^WQRQTcYdeQdY_^g_bcU8_gUfUbTUQ\UbcgX_
think things through, perform competitive market analysis, and perform pro
forma analysis of the “what ifs” usually have great results.
14
@1I@< 1>7?<45>BE<5C
“ Keep it simple and, if you can avoid it, don’t change pay plans frequently.
(We’ve witnessed many examples where complex and ever-changing pay
plans lead to low employee morale and motivation, higher turnover, and
cheating.)
“ The pay plans must deliver a dealership compensation cost structure
which, when applied to departmental gross profit levels, leaves a
reasonable and satisfactory net profit and return on investment levels
for the dealership owners.
15
B 5 D1 9 < 4 5 1 <5 B = 5 > E ? 6 C 5 B F 93 5 C
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18