Get a Grip on ExpensesBy Rex Collins
Article Date: 03-01-2009
Copyright(C) 2009 Associated Equipment Distributors. All Rights Reserved.
Surviving and even thriving in these tough times is possible - but dealers must take a hard look at everything.
The financial markets, automotive industry and housing markets aren’t the only U.S. business segments to stumble this year. Nearly all construction contractors, regardless of specialization, have suffered through 2008 and the start of 2009, and the future doesn’t look any brighter. However, most dealers have the opportunity right now, if they take advantage of it, to: 1.) Right-size the dealership, (2.) Change sales and marketing processes that will maximize their return on investment, and 3.) Take a closer look at all expense items that will result in a stronger bottom line. So let’s take some time and explore some of the things that dealers across the country are doing right now to positively impact their dealerships.
When it comes to fixed expenses, the big five are personnel, data processing, interest, insurance and advertising. However, don’t stop your examination of possible cuts with these five items, as there are probably more cuts to be found. Recently one dealer thought that cutting out $400,000 from fixed expenses was all that could be done at his dealership. However, after he dug deeper, another $100,000 in fixed expense was identified for the chopping block.
Where do you look and what do you do to find these cuts or create the savings that may seem to be pennies but in reality can add up to big dollars? The best first step is to benchmark your dealership. Find out how you compare to your peers in all expense categories and in all productivity ratings. If your gross profit per employee, for example, happens to be too low, then steps should be taken to reduce your employee count or to train your personnel on how to generate more gross profit through their daily activities.
As far as expense analysis goes, in addition to looking at the Big Five, you also need to spend time today looking at some of the other smaller items that can contribute to lowering your expense structure, increasing your fixed absorption and ultimately adding to the bottom line profitability of your dealership.
Let’s put a few things in perspective. Smart dealers realize that they need to spend money to make money. However, smart dealers also realize that dollars spent wastefully will never return to the dealership. While a dealership will not survive long without sufficient sales volume, it can be argued that effective office staff who are watching the expense side of the business can keep more for the dealer than the best salesperson can generate. The true impact of this is demonstrated in the schedule in Figure A on page 44.
Floor Plan Costs
For the first time in years, a dealer obtained quotes from his floor plan lender and three competitors. As you can see in Figure B, the incumbent bank was significantly higher in terms of interest rate than the three other banks. While we understand that it is difficult in this current lending environment to obtain competitive quotes from some lenders, many dealers have strong enough balance sheets and have experienced consistent earnings to allow them, even in today’s environment, to obtain competitive quotes and realize significant savings.
A side note: when comparing floor plan lending agreements, do not forget to consider the various covenants and guarantees that may be forced upon the dealer or the dealership.
Inventory management may be the biggest factor in increasing variable profitability in today’s environment. Enforcing a strict day supply policy and a reasonable wholesale policy once a unit becomes aged has resulted not only in a sizeable reduction in floor plan carrying costs but also in significant increases in variable gross profit. The dealership’s salespeople, sales management and the dealership all will realize increases in their paychecks when the inventory is properly managed.
You will also want to look beyond your floor plan debt to examine all of your debt relationships in order to determine if a better deal can be obtained. A dealership in the Midwest was recently able to restructure their debt. This restructuring resulted in cash flow savings of over $369,000. For a thinly capitalized dealership that is struggling through difficult times, this cash flow savings can mean the difference between life and death.
Property and Casualty Insurance
Dollar for dollar spent, dealers may have the most complicated property and casualty insurance programs of any industry. Most dealers and their employees are uneducated regarding insurance exposures and pricing, thereby leaving themselves at the mercy of the insurance salesperson. Most insurance salespeople are technically weak regarding their competitor’s product. This often leaves the dealer with misconceptions about a competitor’s program. Dealers are also surprised to learn that insurers are free to price their coverage in almost anyway that they please. All of these factors add up to a tremendous advantage for the insurer when it comes to negotiating a fair premium for the coverage extended.
So what can a dealer do? Very simply, the insurance carriers must be put into a competitive situation in order for the dealer to receive the best coverage at the best possible rate. This is very difficult because different companies are aggressive at different times and in different areas of the country. Competition will bring the prices to the lowest possible point, but you must be careful to compare “apples to apples.” Please contact me at email@example.com to obtain a sample of a dealership request for proposal that we use in order to obtain an “apples to apples” comparison.
Another item that dealers are sometimes surprised to learn is the fact that two different independent agents will receive different rates from the same insurers for the same dealership. You should also know that independent agents do not shop your coverage to all insurers. The bottom line with property and casualty insurance is that the dealer must be an aggressive and assertive insurance buyer and is frequently best served by engaging an insurance consultant who works strictly for them.
This could be an entire article by itself. The major issue here is to pay for the results you want and to eliminate as many fixed pay plans (salaried and hourly pay plans) as possible. There are very few positions in a dealership that should not be compensated under a variable or commission based pay plan. For example, parts personnel could be paid in part based upon gross profit generated while service technicians could be compensated based upon hours sold and salespeople can be compensated based entirely upon the gross they generate.
With regards to expense control, involve your managers. Pay the managers on departmental net profit not gross profit and not sales. You may be surprised how eager your managers are to help you control wasteful spending when it impacts their pay.
We have been talking about some very large expense items in this article. A dealer should never forget to look at the small expenses as well. For example, does your dealership purchase legal pads without head strips? The cardboard strip at the top of the legal pad adds from 10 to 20 percent to the cost of the pads yet adds nothing of value. In most cases pads without the head strip are just as acceptable and cost considerably less. The bottom line here is, do not pay for quality that isn’t needed.
Another example would be the use of generic copy paper instead of premium grade. Since most copies produced on copy machines are for internal use the added costs of the premium grade copy paper in most cases is an unnecessary expense. A more cost-effective approach would be to buy a cheaper generic copy paper for everyday copying jobs and a limited amount of premium grade paper for those jobs that need the extra quality.
Ask For Discounts
Figure C shows a typical letter that many dealers have sent to their vendors, and the results were surprising. Many vendors provided at least some if not the full discount requested. Very little effort was required and a very good return for the time that was spent was obtained by the dealerships. While not everyone provided a 10 percent discount, some vendors provided a 5 percent discount and others simply stated they could do nothing. For those vendors who provide no discount, the dealer must competitively shop the vendor’s products in order to realize potential additional savings.
Credit card fees are sometimes ridiculous; but, there are various vendors and you can comparison shop for competitive rates. Some of these vendors require you to buy or lease their equipment so please factor that in when comparing. Sometimes dealerships receive routine phone calls from their current processor asking if there is anything the processor could do to improve the relationship. Some of these dealers have received discounts just by asking for them during these phone calls. As an alternative you might try calling your processor and telling them that you are thinking of shopping rates and see what kind of discounts are offered.
More and more vendors are not accepting American Express and many dealers are following suit. Additionally, dealers should try to encourage their customers to use debit cards rather than credit cards, as the processing fees are significantly reduced.
Retirement Plan Costs
Do you have any idea of the total cost of your dealership’s retirement plan? You may immediately think about the portion of each employee’s retirement deferral that the dealership pays (the “company match”) but don’t forget about the cost of administering the plan. These costs are either paid directly by the plan, which reduces the employees’ account balances or paid by the dealership – and they can be substantial.
The table in Figure D compares some of these typical costs and shows how a simple move to a plan that utilizes a third party administrator (TPA) and family of mutual funds can dramatically reduce these costs. Using an example of a dealership retirement plan with $1,000,000 in assets, Figure D demonstrates that the administrative expenses could be reduced by over 50 percent.
Bar Coding Your Parts Inventory
The use of bar codes have increased the productivity of parts employees and increased the accuracy of the parts inventory. Bar coding has also significantly reduced personnel expense in many parts departments. A dealer should invest a little time in determining whether this technology will help them in the long run.
Do your electric bills seem to be growing? Many dealers have installed timers and sensors to shut off the lights when a room is empty for any amount of time. The same technology can be used on outside lights. The added benefit here is increased security through the use of the lighting as a theft deterrent.
Bad Debt Recoveries
Many dealership customers are having a difficult time making ends meet and, accordingly, many dealers are experiencing record levels of accounts receivable write-offs. When an account is written off, a dealer is required to file a form 1099C with the IRS indicating the amount of debt forgiven. Many dealers have experienced success in collecting past due accounts by mailing a letter as one last chance for the customer to pay what is owed. In this letter the dealer clearly communicates that a form 1099C will be sent to the IRS should the bill not be paid immediately. It is surprising how many customers will at least make a phone call in order to settle this potentially bad debt.
Finally, in this difficult time many dealers are finding sales opportunities under their own roof. A good tactic is to run a list of your best sales customers and run a list of the dealership’s best service customers – cross-promote the dealership to those individuals found only on one list. You may be able to learn why a customer is only on one list, correct processes and maximize your revenue from existing customers.
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