Mid-Year Profitability Check-Up: Use Benchmarking to Improve Your Dealership
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The midpoint of the calendar year is usually the perfect time for dealers to compare where they are with where they want, or ought, to be. One way to add value to a midyear profitability checkup is to incorporate the practice of benchmarking into the process. This article explains why benchmarking is important and how to use the practice to gather valuable data.
Maybe a midyear profitability checkup is something you do every year, or maybe it’s something you always mean to do but never get around to doing. Whatever the case, remember how much value benchmarking and a midyear checkup can add to the performance of your dealership. It is a perfect time to evaluate both the financial standing of the company as well as the overall processes of transactions. This midyear checkup gives you time to improve in the last half of the year.
WHY DO IT?
Simply put, benchmarking means comparing your dealership performance with that of other comparable operations and the overall industry. It can point out areas in which you are doing well and alert you to areas where you’re lagging behind competitors or the industry. While pointing out areas in which you are doing well is a nice affirmation of your performance, pointing out areas of weakness can be more useful in the end. The discovery of shortcomings can lead to improvements in your dealership efficiency and profitability.
WHAT IS MEASURED?
From staffing levels, to expense management, to revenues and returns on investments, virtually any aspect of your dealership performance can be measured and, therefore, benchmarked against the industry as a whole. All it takes is the appropriate information and some means to evaluate the data. The most common way to evaluate the data is by placing it into a spreadsheet and updating it accordingly. A CPA would be someone able to manage this data and offer you immediate feedback in regards to your dealership performance.
Most benchmarks are revenue and profit related. For example, take the total net profit generated by the service department and divide that by the number of technicians you employ to see the average net profit per technician. Compare that figure to other dealerships in your region to determine whether or not your dealership is your technicians. Similar ratios can be developed for parts inventory and even overall employment levels.
You can also use benchmarking to assess the effectiveness of your expense controls. Wouldn’t it be valuable to learn where your dealership stands compared to others when it comes to advertising expenditures per retail unit sold? How much of your gross profit on sales drops to the bottom line compared to those of your competitors or the industry?
WHERE IS THE DATA?
To benchmark successfully, you need good data about your dealership and the dealerships to which you’re comparing your own. A CPA can help you with both the internal and external info needed in order to complete the benchmarking process. Dealership CPAs routinely have connections with factory reps and dealership groups or associations that allow them to obtain overall industry performance ratios.
WHERE ARE THE RISKS?
Because competitors near your dealership may, understandably, be less than willing to divulge much information about their performance ratios, you may have to rely on data from similar operations in other markets. If you do so, be sure to consider inevitable differences. Consider advertising costs which may be markedly different in another region. This could affect advertising ratios which may lead you to believe your dealership is not performing as it should, when in all actuality your dealership is performing adequately for your region.
Comparing your numbers with dissimilar dealers’ numbers also has risks. Can you really compare the results from a dealership that sells a mass-market brand to those from one that caters to the premium luxury market? As with any powerful management tool, benchmarking must be used carefully.
If you do fall well short of the performance of one or more competitors, don’t panic. You may not match the efficiency of another dealership because you have, for example, hired more service advisors, which may be affecting your ratios, but is necessary for your dealership due to increases in that department. Look at other areas at that point. You can lead the region in customer satisfaction, or repeat business because of making necessary hires in an area of your dealership which is growing significantly.
WHO CAN HELP?
Generating benchmarking information is just the first step. Once you’ve got the data, you need to analyze it, and act on it. Here, again, your CPA can be of great help. As mentioned earlier, spreadsheets are usually developed to organize benchmarking information into columns for easy comparison. Your accountant can help you create such a tool and suggest trends you might draw from it.
From there, the power lies in your hands. As mentioned previously, right here and now at the midpoint of the year, you have a great opportunity to assess where your dealership stands and where you may need to focus your attention for the remainder of the year.
If your current CPA has not been proactive in helping you with benchmarking at the midyear checkup, contact HHM to speak to a dealership specialist who specializes in performing such ratio analysis. We have access to industry data and a wealth of information which would allow us to determine how your dealership is performing.