Perhaps the most critical element of financial management in a dealership today is Expense Management and its effect on cash flow. As manufacturers continue to decrease margins in both new vehicles and parts, and as competition continues to accelerate and force lower grosses, reasonable profits can only occur if expenses are managed account by account against the indices of top profit performers. That is why no dealership can afford not to be a part of a business-intensive Twenty Group of their peers. Measuring your business against the best practices of the top performers in every department should be a monthly discipline with your comptroller working closely with all department heads in putting every expense under the microscope, and then together developing an actionable strategy, a strategy many times based on what has been learned during the most recent composite review of your Twenty Group. Perhaps the greatest single value of the Twenty Group experience is the knowledge gained from an intensive, "no holds barred," composite review.
What is a reasonable profit level today, how should it be measured, and what expense levels are required? Because profit levels indeed determine dealership value above all other factors, including franchise multiples, profit needs to be measured in these ways:
1. As a Percentage of Total Assets (What you own and what you owe!)
2. As a Percentage of Equity (What you own.)
3. As a Percentage of Gross (The margins you produced.)
4. As a Percentage of Sales (The sales dollars you handle.)
Each of these measurements tells a story that leads toward an actionable business strategy. For example, in the measurement of Operating Profit as a Percentage of Gross, our current MPG Index is 20.6%. This MPG Index merely reports the news of what's happening in the top 20% of our client base-not always the ideal figure, but a "real time" figure. 20.6% Operating Profit to Gross is a year-end 1998 statistic that is skewed somewhat downward by year-end adjustments, but the message it conveys is that Total Expense for top performers did not exceed 79.4% for the twelve months of 1998. The Operating Profit to Gross index is the best profit measurement to determine whether expenses are properly aligned with gross generation.
What are the key controllable expense accounts? And what do year-end indices show?
Compensation to Sales People 11.0%
Salaries-Supervisors 12.2%
Salaries-Clerical 3.9%
Other Salaries & Wages 10.7%
Advertising 7.5%
Interest, Floor Plan, and Other 2.6%
Rent & Rent Equivalent 6.2%
These seven accounts represent 54.1% of the 79.4% Index Level Expense Factor. Correct these, and you have two-thirds of the job done.
Expense management should not be on the "BET-Come" philosophy. Growth and profitability rarely occur by spending more money. Expense management cannot begin and end at the dealer-comptroller level. It has to involve every player who spends money. For example, your managers manage your greatest asset, and your biggest expense -People. 37.8% of your gross, as indicated by our MPG indices above, are people expenses, and this does not include Cost of Labor-your technicians. Nor does it include absentee wages at 1.0%, or payroll taxes, benefits, and pension at 6.3%. 47.6% of your expense, not including technicians' pay, covers just the salaries and wages of your human assets. How well are they hired? Trained? Managed? Motivated? Retained? How productive are they? How do you measure productivity and efficiency in each job function category? And what steps are in place to improve?
Does your Comptroller have much control over these Human Assets? Probably not! These are clearly department managers' responsibilities. To hold them accountable, they must be involved deeply in the Expense Management discipline.
Next month, we'll take a look at other profit measurements, their significance, and the message they convey about your business. To whet your appetite-if you're not enjoying 18.3% Return on Total Assets, you're not maximizing your potential return on what you own-and what you owe.
Bob Dilmore is Chairman and CEO of Management Performance Group. If you have specific questions or require more information about this subject, please check the appropriate box on the reader response form on page 3. bdilmore@dealeronline.com