As we all know, the gross profit percentage achieved by the wholesale parts department is significantly lower than your retail department. The gross profit percentage generally ranges between eighteen and twenty-three percent. This is approximately half of the percentage of retail parts.
Clearly, a well-managed wholesale parts department can be a significant profit center for a dealership. Conversely, a poorly-managed wholesale parts department can lose money. If you are not fully committed to running and managing this department as a unique profit center, you may fail. Often times, smaller dealerships cannot overcome the costs associated with running a wholesale parts operation. Larger dealers and those with multiple franchises can overcome these costs with volume.
There are many costs associated with a wholesale parts department that should be considered. These expenses include the cost of: parts vehicles, parts delivery personnel, accounting staff to record the transactions, advertising, marketing, bad debts taken on receivables, and the capital burden of maintaining a larger parts inventory.
Collections policies are critical to the operation. With the low margins achieved on the sales, you can’t be chasing receivables or incurring bad debts. For example, a dealer generates $50,000 in wholesale parts business in a month at a 20% gross profit or $10,000. The dealer sells $15,000 of parts to a local body shop. The body shop never pays for the parts, and the dealer takes a loss on the accounts receivable. This results in a $5,000 loss for the month before we consider the costs of the delivery vehicle and the personnel costs. You will achieve the same results, in the example above, if you allow the body shop to return the parts and you can’t find another buyer for the parts. A dealer with proper collection and return policies will not encounter such losses. When we analyze a client’s over-aged parts and service receivables, a majority of the accounts are from wholesale parts.
In conclusion, dealers should be evaluating the wholesale parts operation as a separate line of business. The costs associated with the department must be accounted for in determining net profitability. The parts manager and dealer must be committed to this operation and monitor its profitability.
If you have any questions regarding this article, please contact Paul McGovern at PMcGovern@DowneyCoCPA.com or 800-849-6022.
