STRUCTURING EXPENSE TO GROSS

Many department managers, however, lack the proper focus on Controllable Profitability because:

  • They’ve never learned what the driving elements of controllable profitability really are, or

  • Their compensation plans lack suitable emphasis on the elements of Controllable Profitability.

 

The thrust of this message is to clearly define and communicate the elements of Controllable Profitability and to provide some “Best Practice Guidelines” for your departmental targets. Let’s begin by looking at the combined New and Used Vehicle Departments.

 

We combine the two vehicle sales departments for this analysis because:

  1. Many dealers intentionally manipulate their new vehicle department gross to the advantage of their used vehicle department (or vice versa), and

  2. Several expense categories (i.e. management compensation, advertising, training, etc.) are difficult to accurately pro-rate between the two departments.

 

The first element of combined sales department Controllable Profitability is Gross Profit. This is a function of retail sales volume, overall $PVR, and inventory turn. When calculating Gross Profit to determine Controllable Profitability, you should include any and all Gross Profit that is recorded in Net Additions to Income (i.e. Doc. Fees, hard packs, and manufacturer incentives related to “one more vehicle sale”). The remaining elements of Controllable Profitability are the expenses directly controlled by the department managers. We define the Controllable Expenses in the vehicle sales departments as follows:

  • Salesperson direct compensation expense – this includes salaries, commissions, and other incentives for sales personnel, sales team leaders, closers, and may also include BDC personnel, and demo allowances.

  • Financial services direct compensation expense – this includes the F&I Director, all F&I Producers, and any dedicated F&I Clerical personnel.

  • Direct departmental supervision expense (excluding the Dealer Operator, General Manager, and Controller)

  • Other salaries and wages expense – this includes the expense for the employees within the sales department over which the manager has direct control (i.e. porters, inventory attendants, clerical assistants, etc.).

  • Net new and used vehicle delivery expense.

  • New and used vehicle policy, claims, and service loaner expense.

  • New and used vehicle demonstrator and company vehicle expense.

  • Net new and used vehicle advertising and sales promotion expense.

  • Net new and used vehicle floorpaln interest expense.

  • New and used vehicle training expense.

 

​​In the fixed departments (Mechanical Service, Collision Center, and Parts & Accessories) we see common elements of Controllable Profitability. As in the vehicle sales department, the first element of Controllable Profitability is Gross Profit. This is a function of shop capacity (technician count and quality), transactional count (repair orders and parts counter tickets), transactional quality (lines per R.O. or ticket, hours per R.O., effective labor rate), and margins (business mix, technician cost of sale, parts mark-ups, and discounting practices). The remaining elements of Controllable Profitability are the expenses directly controlled by the department manager. We define the Controllable Expenses in the fixed departments as follows:

  • Salesperson direct compensation expense – this includes salaries, commissions, and other incentives for service sales managers, service advisors, body shop estimators, front and back parts counter personnel, sales assistants, and may also include BDC personnel.

  • Direct departmental supervision expense (excluding the Dealer Operator, General Manager, and Controller)

  • Other salaries and wages expense – this includes the expense for the employees within the fixed departments over which the manager has direct control (i.e. shop foremen, dispatchers, production managers, technical specialists, parts inventory specialists, parts shipping and receiving, parts drivers, porters, shuttle drivers, bookers/billers, cashiers, and other clerical assistants, etc.).

  • Net shop supplies and small tools expense (or profit).

  • Policy, claims, and service loaner expense.

  • Company vehicle expense.

  • Net advertising and sales promotion expense.

  • Departmental training expense.

As identified by the GH&A consulting team, following are the best practice guidelines for Controllable Profitability that are targeted by the highest performing dealers with whom we are, or have been, engaged:

 

 

 

 

 

 

 

 

 

 

 

If you have an interest in learning the make-up of these BPGs by account description, do not hesitate to contact Garry House. Please refer to the "Contact Us" Tab beneath the Connect with Garry button on the main menu. You'll be glad you did! There will be no charge for our initial conference. Remember, GH&A always provides Value First! 

The chart above displays the way that we, at both GH&A and NCM Associates, have trained our dealer-clients in how they need to look at dealership profitability from a "big picture" standpoint. Granted, some franchises in the high-line category significantly exceed these metrics, and there are a few franchises where only the very exceptional dealers achieve these metrics.

We have also learned that the key to enjoying this type of prosperity lies in the two areas of Controllable Profitability...1) maintaining an acceptable gross profit quality per transaction, and 2) diligently structuring and managing the controllable expense categories in each department. Managers who effectively manage these elements of “Controllable Profitability” within their respective operating departments normally produce a significant departmental net profit. This, of course, assumes that the majority of dealership expenses (limited-control and fixed) are fairly distributed to each operating department.

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