Benchmarks: Your Financial Statement Is Telling You Something

There may be more to your monthly financial statement than you realize, data there that allows for benchmarking that delivers a true picture of what areas of your dealership are performing well and alerts you to issues that need attention and even resolution.

We review each of our dealership clients’ statements every month in light of the benchmarks we have developed for that client, by department based on previous performance. By benchmarking and tracking performance on various expense and cost accounts, we and the dealer are able to keep our fingers on the pulse of the dealership’s operation, in particular, its financial well-being. We look at all entries on the statement, but there are several that are particularly telling, that let us know when and where expenses are eating away at dealership profits. Among the expenses we benchmark:

Policy expense or goodwill adjustment
For parts and service, this is a good indicator of how well you’re taking care of your customers. If the expense is excessive, customers might be dissatisfied. A high number usually means that a problem wasn’t fixed right and it had to be fixed again at your expense. A problem might have been incorrectly diagnosed or you might not have the equipment to properly diagnose it, or your staff might lack the appropriate training. In the sales department, a higher than normal policy expense usually means a unit was not properly prepped or reconditioned; something wasn’t operating properly, had to be returned, and you had to, in one way or another, make it right.

Unemployed time for mechanics
A higher than normal number here indicates an inefficient use of mechanics. All mechanics’ time, including training and other non-billable activities, should be accounted for. Benchmarking your mechanics’ umemployed time will help you right-size your service department to handle your service business.

Historical sales levels
A monthly tracking of sales indicates direction: up, down, flat. We track benchmark each department to understand how and where your business is growing or contracting.

Number of repair orders
Track repair orders by periods – monthly, quarterly, etc. If the trend is downward, it can indicate that your service department is not operating in a manner that will be profitable, spending too much time re-working problems that didn’t get fixed initially, or, for one reason or another, losing customers to other repair shops.

Reconditioning costs
Escalating reconditioning costs could be more a sign of a shift in your business practices than a problem that needs fixing. Are you comfortable spending more on reconditioning to get units frontline ready? You might also be taking trade-ins that require additional reconditioning. Whatever the reasons, additional reconditioning expenses should at least translate to additional unit sales.

Finance charge-backs and product cancellations
If these are increasing your F&I office might be operating too aggressively. Are the benefits of product and services being communicated effectively? For example, a customer might cancel a service contract because he or she doesn’t understand the value of it.

Accounts payable balances
A substantial accounts payable balance can be a sign of a healthy dealership, an increase in demand for supplies as business increases. But an increasing AP needs to be examined. When benchmarking pointed to a growing AP at an otherwise financially healthy dealership – good cash flows and adequate working capital – we found the dealer was past due with almost half of its suppliers. Many of its parts suppliers had put the dealer on C.O.D. Word was circulating that the dealer must be failing. The problem turned out to be the AP clerk, who was not getting the work done.

Profit per employee
This is an important metric that should be calculated monthly, both dealership wide and on a departmental basis. Your results will likely vary widely from sales to parts to service, but you can establish benchmarks and trends for each department. Do you have too many employees? Not enough gross profit per employee? Profit per employee is also a key metric when assessing a dealership for buy-sell purposes.

Creating benchmarks for and tracking cost and expense accounts can help you discover problems and implement solutions early. It can also help you unearth theft, improper costing and waste. You should have benchmarks for each location, then measure performance against those benchmarks, and where you have a downward trend, you will be able to make adjustments to prevent losses and restore profitability.

We use these and many more metrics to help our dealership clients discover and address problems and improve operations and profitability. We’d be happy to show you how. Send a recent financial statement to me at rcollins@hbkcpa.com, and we will benchmark your store against industry averages. Of course, we will handle your financial statement with absolute confidentiality.

About the Author(s)

Rex is a Principal of HBK CPAs & Consultants and directs the firm’s Dealership Group. He has worked extensively in the dealership industry since 1984 as a department manager, a general manager and an owner, as well as providing tax, accounting and operational consulting services exclusively to dealers as an independent CPA.

This experience includes working closely with hundreds of dealers from coast-to-coast since 1987 on creative tax planning and financial statements issues. He provides clients with a wide range of transaction work services, and consults for them in specialty areas such as operations, government regulatory compliance, valuations and M&A feasibility studies.

Rex is active in many professional associations. He is the current Chairman of the BDO Dealership Industry Group, contributes articles and commentary to dealership industry publications, is frequently called upon to speak to industry associations and conferences, provides expert testimony, and is regularly quoted by industry and the general media.

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