How to Turn 'Gross Profits' Into 'Net Profits'
By Steve Hall
Have you ever taken the time to analyze how we base the performance of our sub-prime departments? We set our benchmarks based on unit volume and gross profit. This sounds normal to us because we have been raised in an industry that has always compensated us on "gross profit." Allow me to give you an example. If Dealership A was selling 30 sub-prime deals a month at an average gross of $2,500 while Dealership B was selling 25 sub-prime deals a month at an average gross of $1,800, which dealership's sub-prime department is more profitable? The answer? The answer should be, it depends on how fast they are turning those sold units. Let me continue to explain... step one is to identify what the average daily costs for a particular vehicle is for each dealership. To calculate this you would need to take the total operating costs of the sub-prime (advertising, sales compensation, and monthly reconditioning costs of the vehicles in stock for the sub-prime department) and divide it by the total number of days in the month. Then divide this number by the number of units the department stocks and you will have your costs per day per vehicle. For example:
- Total Department expense: $45,000
- Divided by Days in the Month: 30 days
- Divided by Total Units in Stock 40 units =
- Cost per day per vehicle $37.50
Now that you have a cost per day per vehicle, step two is to figure out what the average age of the sold units was for each dealership. If the average age of the sold vehicles for Dealership A was 48 days, while the average age of the sold vehicles for Dealership B was only 19 days, then we can now determine that Dealership B was more profitable, even though they sold less units for less gross. The reason TIME! We know that is costs both dealerships an average of $37.50 a day to keep a vehicle in stock. Therefore Dealership A had a net profit of $700 ( $2,500 $1,800(48 days x $37.50)= $700 while Dealership B had a net profit of $1,087.50 $1,800 $712.50(19 days x $37.50) = $1,087.50.
This is a very hard concept for most dealers to understand because they still believe if they sold a car in 48 days they made $2,500. But when you deduct out the costs of carrying that vehicle for 48 days you make substantially less. The point is, you need to get your management team focused on turning your inventory faster and running with leaner supplies. We have studied some of the most profitable sub-prime departments and what they all have in common is they run leaner supplies of inventory, turn their inventory faster, while averaging a decent gross profit. Just because your sub-prime department is selling a lot of vehicles and averaging high gross profits does not necessarily mean it is doing well. You must take the time to identify what it costs you to keep a vehicle in stock and how long it takes you to sell it. Only then will you be able to determine how "profitable" your department truly is. The best way to get your management team focused is to install incentives on how fast they turn their inventory. This makes more money for the dealership and more money for the management team. We see some of the most profitable sub-prime departments tie their managers' compensation to the average age of the sold vehicles. Do this and I assure you that your vehicles will turn faster and you will "net" more profit.
Steve Hall is CEO of PriceDrive.com, the leading provider of B2B Web-based applications which help automobile dealers manage and turn their used vehicle inventory more efficiently. Mr. Hall is founder and chairman of Custom Finance Services (CFS), a management and consulting company that develops and manages sub-prime finance departments for automotive dealers. shall@dealeronline.com
