Maximizing Profitability: A CPA’s Perspective for Auto Dealerships

Maximizing Profitability: A CPA’s Perspective for Auto Dealerships

In the dynamic landscape of the auto dealership industry, staying ahead financially requires a keen understanding of emerging opportunities and potential pitfalls. As Certified Public Accountants (CPA) specializing in the automotive industry, we are here to provide invaluable insights and strategies to help your dealership thrive. In this article, I’ll delve into essential financial considerations for auto dealerships, including sales and gross profit margin, expense management, tax planning, renewable energy initiatives, and regulatory updates.

Sales and Gross Profit Margins Are Declining

Maintaining healthy sales and gross profit per retail unit figures is crucial for sustaining profitability. Continuously analyze your sales data to identify trends and areas for improvement. Most of our clients are experiencing a decline in sales and gross profit per retail unit sold. Implementing effective sales strategies, such as targeted marketing campaigns and personalized customer experiences, can help drive sales while ensuring healthy gross margins. If you believe your processes are already spot on for front-end sales, focus on other areas of the dealership that can have a more immediate impact on your bottom-line. How are your back-end sales? Are your F&I sales per retail unit sufficient? Is your team effectively managing your days’ supply of inventory? Compare your business today to pre-pandemic levels. Are there deficiencies?

Expense Management

As expenses start to climb, it’s essential to proactively manage costs to maintain profitability. If you haven’t already, conduct a thorough review of your dealership’s expenses and identify opportunities for savings. Implement cost-cutting measures where appropriate, such as renegotiating vendor contracts or investing in energy-efficient technologies to reduce utility expenses. The big 3 expenses, personnel, interest and advertising, are often times where there is “low hanging fruit.” Analyze those carefully looking for opportunities to improve inventory mix and levels, advertising spend per retail unit sold and personnel costs that have potentially ballooned over the past couple of years.

Tax Planning

Strategic tax planning can significantly impact your dealership’s bottom line. If you aren’t already, engage with your CPA. Consider your long-term plans and organizational structure. Take advantage of tax-saving opportunities, such as the Section 179D deduction for energy-efficient improvements to commercial buildings, cost segregation studies or other tax saving opportunities.

Regulatory Updates

Stay informed about changes to tax laws and regulations that may affect your dealership’s operations. For example, be aware of the Massachusetts millionaires tax, which may impact high-income earners in the state. Understand the implications of filing statuses for both federal and state tax returns, as changes in filing requirements can affect your tax liability. For example, those with a status of married filing separately in 2023 can have a big impact on the millionaires tax. This is a one-year deal though since the loophole is closed for 2024.

Renewable Energy Initiatives

Investing in renewable energy initiatives, such as solar installations and electric vehicle charging stations, can offer long-term financial benefits while reducing your dealership’s environmental impact. In addition to potential tax incentives, buying renewable energy credits to offset your dealership’s carbon footprint can further demonstrate your commitment to sustainability and attract environmentally conscious customers. Remember though, if you invest $80,000 in energy credits and you get a $100,000 benefit, you’ll have a capital gain of $20,000.

Increase in IRS Audits

With the IRS increasing scrutiny on tax compliance, it’s more important than ever for auto dealerships to maintain accurate and thorough financial records. Be proactive in addressing any potential audit risks by implementing robust internal controls and conducting regular self-audits of your financial processes. Work closely with your CPA to ensure compliance with tax laws and regulations and minimize the risk of audit exposure. The good news is that the IRS is way behind in their goal to hire more auditors. The bad news is that despite that, many dealers are large taxpayers in their markets and are getting selected for audit. Navigating the financial landscape of the auto dealership industry requires a strategic approach and a thorough understanding of key financial considerations. By focusing on sales and gross profit margins, managing expenses, optimizing tax planning strategies, embracing renewable energy initiatives, and staying abreast of regulatory updates, you can position your dealership for sustained success and profitability. Consult with your CPA regularly to develop a comprehensive financial plan that aligns with your dealership’s goals and priorities.

By Barton D. Haag, CPA

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Bart joined ARB in 1996 and is a Principal with the firm. The growth of ARB’s Auto Dealership Group is a natural result of consistently anticipating the needs of dealerships and providing savvy, sensible and customized services at fair prices.

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