Little Things Add Up - On The Numbers
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SECTION: On The Numbers

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Little Things Add Up


Article Date: 10-01-2007
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.

Adding a small percent to gross profit may be easier said than done, but it's well worth the effort.

When I review the annual Cost of Doing Business report I look at the entire report from top to bottom. The main numbers we always discuss are sales, the sales mix and the sales average for all survey participants. We also have a column for the High Profit (HP) dealers, which represent the top 25 percent of the survey respondents for that particular year. The HP dealers make a little more on gross profit percentage but also have better expense control over all operating expenses that appear below the gross profit line.

For example, this year the differences were as follows:
                                              HP           Typical
Gross profit %                         21.5%         20.2%
Payroll %                                  8.7%        10.0%
Occupancy %                           1.5%          1.7%
Other operating expenses %       3.6%          3.9%
Profit before tax %                     6.9%           3.0%

Small changes in each category result in twice the pretax profit for the HP dealers. For a $50 million dealership the profit differential is approximately $2 million! That certainly is a lot of cash to be leaving on the table.

Drilling down a little deeper we see the largest contributors to this result are the 1.3 percent difference in the gross profit margin and the 1.3 percent difference in the payroll figure. For a $50 million operation each of those differences represents $650,000 or 65 percent of the total pre-tax profit difference. Following the old 80/20 principle, these two categories would be a good place to start if you also want to get to the 6.9 percent pre-tax profit number.

Could we get an additional 1.3 percent out of the sales function? Sounds easy but we know it is not. You would have to play around with the Business Segment Analysis Report, which breaks down the gross profit for each profit center and then work with your sales mix to see what needs changing. You'd also have to inform the managers what needs to be done and then have them track the progress as you try to meet this goal. I suspect each department could add something to the gross profit line if forced to do so.

On the expense side, the biggest change is in the payroll line, which is made up of nontech payroll, payroll taxes, and insurance, including health and workman's comp and employee benefit programs. Since this category also represents a $650,000 expense reduction we are talking a significant change from the typical dealer. When you examine the CODB report it looks as if the bulk of this savings is in the people count. At $650,000, that could mean 10 to 15 fewer people (or maybe more) used to operate a $50 million dealership.

Based on my experience, that $650,000 is made up of excess overtime, lack of outsourcing, late personnel adjustments during seasonal fluctuations, poor hiring practices, poor system documentation, improper use of computer systems, lack of internal controls, poor planning, and, as we have heard many times, a lack of on-going inspections. (Don't expect what you don't inspect!)

In addition, many dealers do not manage their insurance expenses properly, nor do they get the professional help they need to do so. The consumer-driven health plans will save you dollars if installed properly, including proper employee education. And who the heck knows what is going on with the insurance industry's general insurance and workman's comp. These days it is not a bad idea to have someone in your corner to decipher what the insurance company is telling you.

Looking at the rest of the operating expenses as listed in the CODB brings up other opportunities as well. There is a 10 percent cost reduction available in almost every category, and there are people out there to help you get those benefits for little up-front cost and a piece of the savings. Proper budgeting and proper budget adjustments through the year will also bring about savings.

When all is said and done it appears the first front to attack would be the gross margin line. Work the sales mix, adjust discounts and pricing, find more to bill for in service, adjust prices in parts, and offer incentives for performance. Operating expense reductions would be next. If it is there, you can find the

The people issue is the toughest and may take some time to fix if you need to redo procedures - and make certain you are getting the most out of your computer, too. The easiest part here is to take advantage of outsourcing by making sure your staff is not doing work your vendors should be doing. Every effort should be made to push as much back on suppliers as possible.

It's a lot of small changes that add up to large profits. Good times or bad, this exercise is a must.

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Article Categories:  Financial