AUTOMOBILE DEALERSHIPS
Back to the Future
Mark V. Dow Managing Principal, CPA, MST
26 April 2018

It has been 33 years since the cult classic Back to the Future, starring Michael J. Fox, came out in theaters. It seems almost as long since certain dealership expense items, asset management, and inventory turnover have undergone close scrutiny. Dealer profits can be very strong even during times when vehicle sales are not rising. Think back 6-7 years when you measured twice and cut once!

A short list to focus on:

The Devil is in the Details
Pay close attention to the details. Ensure that someone in management is very familiar with the financial and operational aspects of each department. Familiarity with the details will allow you to quickly understand how external changes impact your results. This requires a certain amount of discipline and persistence. Careful review of key performance indicators will allow you to prioritize resources.

Cash is King
Accumulating cash is a good thing, both inside and outside of the business. Money makes money. Having the appropriate levels of cash and working capital in the business allows you to meet factory and banking requirements, provide funding for expansion and allows you to take advantage of opportunities that come your way.  Be cautious with debt as interest rates are rising. While real estate and dealership “blue-sky” are based on fair market value, debt is only paid down by making cash payments!

Manufacturer Rebates and Warranty Claims
The factory rebate and incentive programs can be complicated and, on occasion, misunderstood. Nevertheless, rebates and warranty claims are often written off when they could have been received if they had been administered properly. It is best practice to review the status of these accounts twice per month at minimum This process should involve both the office and the service manager, with status reports provided to the GM and dealer. Those claims that “should have been paid by now” almost always have an issue.  These need to be reviewed immediately for resubmission.

Inventory Management
Managing both inventory and floorplan interest costs should be put back on the front burner. With multiple interest rate increases and more to come in 2018, the days of “free” floorplan are behind us.  Inventory turnover helps to minimize interest as well as the “frozen” assets that tie up cash. Ordering of inventory needs to be controlled by management and a clear policy should be put in place for handling aged units.

Why It’s Called “Fixed Operations”
A well-run service and parts department can be the cornerstone of a dealership. By its nature, the net income from these departments is more predictable and can cover much of the dealership’s overhead.  Be sure to pay attention to this area, as it is often overlooked.  When it comes to proper labor rates, manager approval for policy adjustments, and parts matrix pricing, the right mix of technicians and inventory control are all key factors to watch. Keeping CSI scores high is also a key element, as this can impact factory incentive payments. Also, be sure you are maximizing your manufacturer reimbursements on warranty parts and warranty labor rates. We can help with this one!

Service Loaners
It is well known that for many brands, providing service loaners has become a standard practice. The expense associated with a loaner fleet has grown substantially over the last several years, and, to some degree, it is a cost of doing business. Therefore, it is critical to manage the fleet properly and maintain the right number of units.  The purchasing of off-lease cars should be coordinated with units coming out of loaner status, to avoid a bottleneck in inventory. Additionally, the use of rental car companies should be examined.  Dealers often have a significant amount of loaner vehicles and it should be clear who is responsible for them. This is an area that is often overlooked.

Treatment of Service Discounts/Policy
Good customer service is a vital cog in the wheel of any business.  When a repair doesn’t work quite right or there is a misdiagnosis, providing an allowance to your service customers just makes good business sense. There are times, however, when this can be used as a crutch and service department margins can suffer if the use of “policy” adjustments is not monitored. Sometimes “writing it off” is an easy way to avoid a difficult conversation with a customer. The result is that margin often slips away, even when there was likely a middle ground that could have resulted in a fair charge for the work performed.

Software & Technology Products
How many software “products” and “tools” do you currently pay for and how do they maintain or improve your gross margins?  Many of these products are charged to the dealership through the manufacturers’ parts statement or the dreaded “monthly” bill that is on autopilot, requiring no approval month after month. There are other miscellaneous charges on the parts statement that may not add value to your operation. A careful review of all these products may uncover significant savings. While you are at it, line up all the “internet” lead generators and determine which ones work and which are simply dragging down the bottom line.

People Matter
Businesses frequently analyze the various aspects of their operation, make certain adjustments, set goals, measure the results and then find little to no change. Having good people always helps, but having the right people in the right seats on the bus can make all the difference. Be sure to understand the realistic operating metrics that each department should be achieving and then work to find the right people to manage to those metrics.

An Ounce of Prevention
Dealers are among the most entrepreneurial of all businesspeople.  The communities they serve and the people they employ benefit greatly from this can-do attitude. The great lesson from the last downturn was that “managing risk” isn’t just a phrase. We know quite well that as CPA’s, our nature is to row a little too close to shore. The risks dealers take are often what makes the business thrive; just don’t find yourself too far out to sea when the tide turns.

O’Connor & Drew has served auto dealers for over fifty years. Mark Dow, CPA, MST is a principal at the firm. He can be reached at 617- 471-1120 or at [email protected]

 

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