Overall, the outlook for auto dealerships as we move into 2021 is cautiously optimistic. There’s a lot to be said for positive beacons signaling improvement right now, even if there is a cautionary slant. Forecasting in 2021 is a balancing act. We’re working off of opposing expectations: 1. COVID-19 vaccines will become widely available, the workforce will return, drivers will get back on the road, and dealerships can operate under less stress and fewer restrictions, and 2. COVID-19 cases will continue to climb, leading to further disruptions in production and the supply chain.
The NADA anticipates a 7.2% jump in 2021 new-vehicle sales compared to what we saw in 2020. Low interest rates and a continued consumer mindset focused on avoiding the possible health risks from ridesharing and public transport leave room to hope for an economic surge later on in 2021. New and expanded market growth is expected for electric vehicles, dealership collision repair centers, and other alternative profit centers.
Buy/sell activity was already up at the end of 2020, and the lively M&A landscape is expected to continue in 2021. These transactions may prove to be especially challenging for businesses with outstanding PPP loans. Technical considerations aside, opportunities to capitalize on the low cost of capital and leverage low interest rates are there.
Forecasting in 2021 will require a higher level of strategic planning, but it still begins with the basics.
As it would in any year, forecasting in 2021 should start with a review of the books. Keep tight control over expenses and work with your CPA on a cost-cutting or management strategy. Align your accounts, ensuring they are standardized across franchises, especially for multi-dealership groups not operating from a centralized location. Consider using balanced scorecards to circulate pertinent dealership financial performance data to the right employees and departments. Maintain strong gross margins on vehicle inventory and F&I, especially as new inventory creeps back into the market. Management of new and used vehicle inventory should be tighter this year, and plans for placing orders with the manufacturer and managing supply chain issues will need to be in place.
Smart tax planning this year means avoiding hits AND leveraging opportunities wherever you can.
Assess qualified real estate holdings to leverage Section 179D deduction opportunities. Assess business interest expense to determine whether your dealership is eligible to use 100% bonus depreciation (business interest expense, including floor plan financing interest, must not exceed business interest income plus 30% of ATI). Take advantage of the 100% meals and entertainment deduction, temporary provisions for charitable deductions, and other CARES Act provisions for businesses. Has your dealership developed or improved internal and client-facing software to remain competitive and engage in e-commerce? You could be eligible for the R&D Tax Credit. Did you have employees on the payroll throughout the pandemic, or did you pay the health care costs for furloughed employees? You may qualify for the Employee Retention Credit. If you received a PPP loan, are you maximizing loan forgiveness? Don’t forget state tax implications. These can take a bite out of your PPP apple.
Managing employee headcount will be an essential part of optimizing your dealership’s efficiency.
If you haven’t already, take inventory of your employees and departments to identify redundancies or underperforming areas. It may be time to restructure. Are your employees motivated and incentivized? Your operations and profitability are directly related to employee morale. Keep actively recruiting. It’s the best way to ensure you are attracting and retaining top talent.
Creative marketing efforts will go further as the industry continues to experience digital transformation.
Boosting your online presence will go a long way toward keeping up with consumer expectations and staying ahead of competitor strategies, especially in a post-covid market. Use social media wisely; it’s a low-cost advertising solution that casts a wide net. As online leads increase, you may find that using a business development center (BDC) to manage online leads would serve your dealership well. With fewer face-to-face sales, you may also consider the perks and long-term ROI of investing in customer relationship management (CRM) software.
ARB’s Auto Dealership Services Group is ready to provide savvy, sensible solutions for your dealership’s plan for 2021. There’s a lot to consider this year, but my team is dedicated to keeping dealerships on the leading edge of industry trends and legislative updates. Contact me today to discuss a strategy for getting started.
by Bart Haag, CPA
Barton Haag joined ARB in 1996 and has been a principal with the firm since 2005. As the Practice Leader for ARB’s Auto Dealership Team, Bart provides financial accounting, income tax planning, and business advisory services for clients in the automotive and motorcycle dealership industries. He also works with closely-held businesses, many of which are family-owned.