Profitability Through Expense Control

Rearview of parked cars. expense control

Profitability Through Expense Control

Rearview of parked cars. expense control

This article was originally published by the MSADA

Although not as strong as they have been the past couple of years, dealer profits have generally been strong again in 2023 and are still better than average. Our clients are making 3.7% net to sales according to our Auto Dealer Business Intelligence (ADBI) analysis; still very good but much less than the 5.3% they earned in 2022. One thing that is clear is gross profit is lower than last year at this time (13.1% in 2023 vs 15.0% in 2022) and expenses as a percent of sales are starting to creep higher (11.2% in 2023 vs 11.0% in 2022). Depending on whom you listen to there are some serious head winds over the next year or so worth considering and for which dealers should start planning.

As you prepare business plans and budgets for next year, now is a good time to review your biggest expense categories and make sure you can make quick adjustments for a potential downturn. For example, one area of expense that is especially showing an increase is personnel expense. Oftentimes in periods following strong profit years dealers experience “bloat” in their headcount or payroll. On average, in 2023 our clients are selling approximately $102,000 per employee per month versus $105,000 in 2022. Now is a good time to review each position and ensure you identify any non-essential employees and have a plan in place. It is also a good time to review pay plans both to ensure they are appropriate for the times and reward your goal of increased profitability.

Our AutoCPA Group recently met with Doug Austin, founder and CEO and Chris Austin, EVP – Marketing and Sales of Strategic Source. Strategic Source is more than an expense management company, their team also assists with sourcing expertise, supplier compliance and implementation management. During our meeting we discussed the top 10 best spend management practices. These were an excellent reminder of how a dealership should approach expense management and is a timely exercise as dealers prepare for next year.

1.       Purchasing structure and personnel training – Having a structure that you follow every time you buy something from a vendor is critical to expense management. Perhaps as important as having structure is training your team regarding that process.

2.       Implementation of purchasing policies – These policies establish limits for various team members on the amount to which they are able to commit the dealership. Among other critical steps, a purchase order policy is part of this system. Using purchase orders helps to ensure you receive only what you ordered, in the quantity you ordered and for the agreed upon price. This in conjunction with a quoting policy is a very powerful internal and expense control.

3.       Setting spend management objectives – Utilizing these objectives, you establish measurable cost and supplier base reductions. Reducing the number of suppliers you work with gives you more negotiating power and better internal control over your suppliers.

4.       Developing a spend map/plan – A spend map is a plan for each expense line item. A spend plan helps to avoid last minute firefights when you do not achieve your desired outcome. It also ensures you achieve your desired results.

5.       Contract management – Managing contracts is rarely done correctly. Properly managing contracts means storing all contracts in a centralized location and outlining the important terms of each contract on a summary sheet. The benefits of contract management are minimizing auto-renewals, price increases and potential litigation.

6.       Implement a sourcing process – There are multiple steps to a proper sourcing process. With a sourcing process you will have consistency in your approach to managing expense categories. A sourcing process is also critical to realizing your spend management objectives.

7.       Implement a supplier management process – Without a properly managed supplier process dealers run the risk of having larger than necessary supply bases, inefficiencies and unplanned price increases. This process is especially important in today’s environment. It will allow the Dealer even more negotiating power.

8.       Implement a commitment process – A commitment process generally includes a 3-way match process: 1. A purchase order is generated 2. An invoice is received from the supplier 3. A packing slip is matched up with a purchase order and invoice. This process will help dealers reduce fraud in their dealerships and help them to manage/reduce costs.

9.       Conduct supplier compliance audits – This process is designed to help you manage the relationships you have with suppliers to ensure pricing and service levels are what was agreed upon. A supplier compliance audit will help to reduce over-charges and help you with developing better supplier partnerships.

10.   Establish an expense management process – An expense management process will help you and your team keep your finger on the pulse of expenses, even some of the more mundane expenses of the dealership. It will help develop a good internal control system, help you to improve profitability and ensure overachievers are properly recognized and rewarded for their effort.

Expenses over the next year will be a much bigger part of the profitability equation. Making certain your process is complete and your people are well trained will ensure you are successful managing these important relationships. Please contact an ARB Auto Dealer Services team member if you would like more information.  

By Barton D. Haag, CPA

Bart Haag ARB Principal

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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