Do you feel uncertain about forecasting your dealership’s financial performance for the coming year and setting a budget? With unknown factors in the mix, having misgivings is understandable. But there’s a way to lay solid groundwork for your 2015 financial planning, and it involves analyzing your financial performance in 2014.
The suggestion here is collaboration with your Baker Tilly accountant in a review of your dealership’s financial performance in 2014, organizing the details in ways that will provide better insights into where you did well and where there’s room for improvement. You’ll need to determine your current financial position before plunging into 2015.
Ratios, financial indicators tell the story
Several financial indicators and ratios deserve especially close scrutiny as you recap this year’s performance. For starters, examine your gross profit margin in order to see the big picture. Break down the margin by your store’s key profit centers: new and used vehicles, parts and service. As a means of comparison, a well-performing dealership today is seeing gross profits as high as 6 percent to 9 percent on new vehicle sales, 10 percent on used vehicle sales, 30 percent to 35 percent on parts and 70 percent to 75 percent on service, according to industry consultants.
The numbers in your breakdown will vary depending on vehicle type (for example, cars vs. trucks) and individual vehicle models. A look at luxury vehicles vs. nonluxury vehicles and domestics vs. imports will further detail your gross profit margin.
Next calculate your net profit margin, which will help you make informed executive decisions for 2015. For example, a dealership’s net profit is often the starting point to determine annual employee bonuses, if you award them. To determine your net profit margin, subtract all overhead expenses involved in operations from your profits. You can use the same approach for each of your store’s profit centers.
Fixed costs, other metrics provide insights
Other metrics that significantly influence your net profit margins, such as your fixed costs, are also important to know. Because fixed costs typically vary little from time period to period, finding ways to rein them in shouldn’t be too difficult. Examine expenses such as rent, utilities, data — for instance, Internet provider costs — office supplies, coffee service (if you have it), subscriptions and dues. Do you anticipate any of these expenses going up (or down) next year? If so, implement corrective measures to get them in line or adjust your 2015 budget accordingly.
Taking a look at your inventory turnover is another crucial part of the recap process. You’re paying too much interest and other carrying costs if you have too much new and used car inventory. So determine how many days of supply you’re currently carrying. Balance that figure with the goal of offering your customers the selection they want.
Here’s an industry rule-of-thumb: Carry about 45 days of new car inventory and 60 days of used car inventory. Your gross profit per vehicle sold starts to plummet if your vehicles move more slowly than this, according to industry studies.
Your current ratio, which is calculated by dividing current assets by current liabilities, measures your liquidity level. It signifies your ability to pay off existing debt, and helps you get a handle on how your dealership will do in the coming year.
Also related to liquidity, your manufacturer might set minimum working capital requirements expressed as a minimum dollar amount. Because the specific methodology for working capital calculations varies manufacturer by manufacturer, you’ll want to know how your manufacturer arrives at its figures.
What percentage of your vehicle-buying customers buy your finance and insurance (F&I) products? That percentage represents your store’s F&I penetration, which is typically higher with high-end vehicle sales. F&I products offer your dealership a chance to boost per-vehicle profits. So don’t overlook the importance of selling extended warranties, gap insurance and other offerings from your F&I line.
Benchmarking provides greater insights
You’ll also want to familiarize yourself with the process of benchmarking if it’s not already part of your financial regimen. To make your metrics more meaningful, compare them to those of your competitors and peers. How do your numbers stack up against similar dealerships in your geographic area? Benchmarking allows you to consider your metrics in a broader context.
You’ll also want to compare your financial ratios and indicators to your historical results. Is your dealership’s financial performance better, worse or the same as in previous time periods? An automotive dealer 20 Group, which brings together similar, noncompeting dealers from a broad cross-section of the country, can supply you with benchmarks. We also may be able to furnish them.
Ready, set, forecast
Once you have your financial indicators, ratios and benchmarking data, you’ll be able to get down to next year’s business. Armed with this information, you should be able to wrap your arms around goals and forecasts for you dealership in 2015. And creating a financial plan for the coming year likely won’t be as hard as you imagined.
For more information on this topic, or to learn how Baker Tilly dealership specialists can help, contact our team.