May of 2021 was a tremendous month for our clients. Several clients had record profits for the month. This article analyzes the factors that contributed to these record profits.
As we all know, low inventories and high demand have resulted in enormous gross profits per vehicle sold. Another factor on the revenue side is the recovery of activity and sales in the parts and service departments.
While most of the focus has been on vehicle sales and the high gross profits attained. An overlooked factor in the dealers’ surge in profitability has been the overall containment of expenses.
Personnel Expenses – Dealers have lowered personnel counts as compared to pre pandemic levels. Dealers have found that they can operate efficiently with employee levels that are 85% to 90% of prior levels. Furloughed/weaker employees have not been recalled. Employees that were not recalled were costing the dealership sales, were a burden to the expense structure, and created morale issues.
Advertising Expenses – In April and May of 2020, dealers suspended their traditional advertising campaigns. However, they did focus on maintaining and enhancing digital platforms. Vehicle sales returned to pre pandemic levels in May and June of 2020 with lower dollars spent on advertising. Dealers learned a lot and continue to operate with lower advertising budgets while focusing on lower cost digital options.
Interest Expense – After considering floor plan interest credits, the net interest expense is providing income to dealers. This is a factor of lower inventory balances, lower interest rates, and the use of cash generated from profits and PPP loans to reduce the floor plan balance.
General and Administrative Expenses – In March, April, and May of 2020 dealers analyzed their expenses and made cuts in other areas of general and administrative expenses.
In the upcoming months, inventory shortages will be a factor in maintaining profit levels. I would not be overly concerned as dealers’ year to date profits are high and you can afford to see a drop in monthly profits. New inventory supply levels are out of your control. Some of our smaller clients have year to date profits of over $1,000,000, while some larger clients have achieved profits of over $1,000,000 in certain months.
If you have any questions regarding this article, please contact Paul McGovern at 800-849-6022 or at PMcGovern@DowneyCoCPA.com.
