Typhoons & Tariffs: Dealers Need to Prepare for the Unexpected and Unpredictable

Just as you plan to protect your dealership from unpredictable events like storms and fires, you need to be prepared for what might happen to your business should the economy stall. In fact, current indicators for our industry are concerning. Interest rates are headed up, tariffs are driving prices higher, and housing starts, a leading economic indicator for our industry, are down.

Like the weather, you want to know what it’s going to be like out there, and have a plan for dealing with it. Unlike the weather, there are many factors to concern yourself with in forecasting the future for your dealership, more variables with much greater impact.

Expenses
A good place to begin preparing for an uncertain future is to take a hard look at expenses. Start with the big five – data processing, insurance, personnel, advertising and interest – but don’t ignore the small stuff. You will be surprised to see how much expense you can cut by attending to the littlest things – paperclips, notepads, etc. Examine every line item for efficiencies. We recently found a half million dollars in savings for a dealer by doing a cost study that addressed every expense item.

Work with your managers to determine what can be done to control and reduce costs, everything from utility bills to workers comp claims. Inventory your fixed assets to determine if there are assets on your books that you no longer own. If so, take the tax related deduction, but also notify your insurance provider so they can adjust your premiums – no sense in protecting assets you don’t have.

Forecasting
Forecasting is vital. Look to your future with a critical eye. Get your managers’ views on what they think will happen in their departments in the coming year, then determine what you can spend. You need to match your expense structure to expected income, then convert that to a cash flow analysis. As cash flow is the lifeblood of the dealership, examine your needs in detail – mortgage, credit, capital loans. In a recent engagement we were able to save a dealership in excess of $300,000 in annual cash flow simply by renegotiating the terms of their loans.

Forecasting sales and cash flows is neither easy nor an exact science – and the uncertainty on our economic horizon makes the process even more difficult. Here are a few things to do to help you develop a forecast you can use to plan your year:

  • Personnel. Look at doing more with less. We recently surveyed our dealer-clients and learned that many are cutting staff, increasing their gross profit per employee per month. They are also implementing new technology to improve efficiency.

  • Plan for the worst but also forecast for the best. We typically develop two or three forecast versions for our dealer-clients. We have a plan for what to do in a worst-case scenario, but also enough product and staff to support best-case scenarios.

  • An annual forecast is helpful, but predictions go stale. Your plan should be revisited periodically throughout the year. The economy can turn on a dime, as we were reminded so vividly in September 2008. We saw the signs – in particular, too many unqualified buyers getting loans – but who could have predicted the magnitude and scope of the downturn. Consider the potential impact of a tariff war, which is already driving up the cost of steel. Plan to revise your forecast at least quarterly; it has to remain valid for you to run your business accordingly.

  • Interest rates. We might not know when, but we do know interest rates are on their way up. That’s a double whammy for dealerships, increased operating costs you and higher monthly payments for your customers.

  • Set goals. Goals play an important role in every part of your business, not only for departments, but for marketing, sales, succession planning. They provide direction and motivation, and measure your forward progress. They allow you to stay focused on the big picture. Involve your mangers by having them identify one or two SMART (Specific, Measurable, Attainable, Relevant and Time-based) goals for the coming year. Brainstorm the possibilities, but also consider what is realistic and what you can afford to support.

  • Identify obstacles and assign responsibility. Determine the resources you need to accomplish your goals. Set steps along the way and meet with your managers to ensure a steady climb. Prioritize goals by their importance to your bottom line. Chart your progress and share the results with staff; it’s important to all because that’s where their bonuses will come from.

  • Create an action plan. Focus on today. What are you and your managers going to do today to move your dealership toward achieving your goals. You need to work on tasks at hand. Convert goals into an action plan then to tasks.

  • Know your business and your customers’ businesses. The more you know about your customers’ businesses, the more accurately you will be able to forecast, and set achievable goals.

Expect the unexpected. Plan for a best-case scenario, but be wary of typhoons and tariffs. Your bottom line, even your survival, depends on it.

The HBK Dealership Industry Group helps dealers identify costs and savings strategies with customized cost study programs. The group typically provides dealers with a 20:1 ROI when performing these customized cost study programs. If you would like to talk to us about doing a cost study for your dealership, contact Rex by email at rcollins@hbkcpa.com; or by phone at 317-504-7900.

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.

Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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