Why are many dealers recording lower profits in 2017? Dealers are stating that sales are good, albeit flat or slightly lower, and inventory supplies are adequate. In spite of these factors, most dealers are not as profitable as in recent years. The top line, sales figures, are still strong; yet the bottom line, net income, figures are weaker. The reason for this is the dealership’s expenses are higher than they were in years past. The key to the success and profitability for 2017 is to keep an eye on your expenses.
The most significant expense increase is in the area of personnel expenses. Sales have been robust the last few years and dealers hired back staff and sales positions that were terminated during the tougher past recession years. This is true for all businesses and is contributing to the low unemployment rate. Dealers can cut their personnel expenses, especially in the sales department by weeding out the under performing sales personnel. Also, do dealers need as many sales people when the BDC center is doing a significant amount of the pre-sale work?
Another expense item that is significantly higher than in past years is advertising expenses. Many dealers have changed their advertising strategies to focus more on internet advertising which is significantly less expensive than print and media advertising. However, some dealers continue to use print and media advertising and are paying significantly higher costs than in the past. If the latter is a major part of your advertising strategy, it may be time to reduce expenses and shift to less expensive and more effective internet advertising strategies. Internet strategies should be tracked and only those that produce the highest percentage of closed sales should be maintained to optimize your return on investment.
Higher interest rates and robust inventory levels have contributed to higher new vehicle floor plan interest expense. The key to keeping this expense down is in your inventory turn. The less time a vehicle stays in your inventory, the less interest expenses will accrue. Pay heed to aging vehicles on the lot. Ensure they are ready to sell, prominently displayed, and discussed often at sales meetings. Additionally, you want to maximize the credits available from manufacturers by putting strategies in place to turn those credits into net profit.
I would not suggest a reduction in parts and service expenses as the “back end” of the store will carry the dealership if sales continue to soften.
A significant factor in a dealer’s continued profitability is a back to basics business philosophy which includes expense control. When the economy is robust, some dealers get distracted and lose that focus.
When sales are good and the overall industry news is positive, you must not let your attention waiver from expense management and maximizing potential net profit. Low expense structures with healthy sales equate to higher profits.
If you have questions in regard to this article, please contact Paul McGovern at pmcgovern@downeycocpa.com or 800-849-6022.
