New vehicle sales have softened slightly but are still at high levels. Dealerships with strong management will continue to generate significant profits.
The following are some of the keys and questions to consider in order to maintain profit levels in 2018:
- Manage inventory of new and used vehicles to appropriate levels. Excess inventory results in aged units. We all know that gross profit drops significantly as vehicles age. This is especially true for used inventory. Calculate your day’s supply and do not exceed sixty days. Consider booking used vehicle write downs on a monthly basis to gain the attention of the used vehicle manager. With higher interest rates, excess inventories create an unnecessary monthly expense.
- Many new vehicle dealers are struggling in the used vehicle department. It is difficult to merchandise late model used vehicles when the incentives are so strong on new vehicles. What is your plan to combat this dilemma?
- We have seen advertising expenses increasing year over year. Make sure this expense is reviewed for effectiveness and is properly controlled and budgeted.
- Personnel expenses continue to sky rocket. Employees demand high wages and aggressive compensation plans. Make sure your compensation plans are properly aligned with the profitability of the store. Underperforming employees should be eliminated.
- The BDC is a significant expense to a dealership, although the BDC is critical to creating sales leads. Dealerships that are not operating efficiently in this area will struggle. How does a dealership cover these costs in a low gross profit environment? Sales staff should be selling more vehicles each month as much of the prospecting is now done by the BDC. Since you are paying both the BDC and the salesperson, should the salesperson receive a lower commission?
- The F & I department is becoming increasingly important to the profitability of the store. The front end gross is close to zero in many cases, and the only opportunity for any profit resides in the F & I department. Make sure your F & I managers are properly trained and managed.
- The service and parts departments produce a significant portion of your monthly gross profit. Considering the fact that the gross profit percentages are between 60% and 75% and 30% to 40% in service and parts respectively, where should the focus in the store be in a declining vehicle sales environment?
- Do not discount the value of a body shop. This is another department that can generate additional gross profit for the store. Many dealers and smaller independent body shops are closing. There is an opportunity to grow your revenue in this department.
In conclusion, 2018 should be another strong year for dealers. Dealers need to maintain their focus in all of the departments in this ultra-competitive environment. Demands from manufacturers will continue to grow and this will lead to increased expenses. Proper expense control is critical to maintaining profitability.
If you have any questions regarding this article, please contact Paul McGovern at PMcGovern@DowneyCoCPA.com or at 800-849-6022.
