For many dealers, it’s been several years since they’ve had to actively manage the financial health of their dealerships. Grosses were at historical highs, demand outpaced supply, interest rates were low—it was easy to feel, and be, financially secure. Fast-forward to today, and essentially all of those comforts are gone. Volume is holding on but grosses are back near pre-pandemic levels, inventories are building (especially for certain franchises), and interest rates are at their highest level in over twenty years. These challenges create enough uncertainty without throwing in something like the CDK incident that many dealers are only now recovering from. However, this doesn’t mean that times are bad, but it does mean dealers need to pay attention to, and actively manage, the financial well-being of their dealerships. Below are some issues we think dealers should consider as they look for opportunities to strengthen and safeguard their financial position.
Risk Assessment and Management
It’s difficult to protect yourself if you haven’t done an assessment of the risks and threats faced by your dealership. Now is a good time to look at your stores and try to determine the types of events that could have a significant, negative impact on your operations. Are the types of risks you identify something that you can insure against? Is your coverage adequate? What does filing a claim do to your premiums or ability to obtain coverage in the future? It’s important to review your insurance coverage and assess whether it’s providing the protection you’re expecting. Make sure you understand your policies and watch out for language that may present an obstacle for having a claim paid.
Another important aspect of risk management is having a current disaster recovery plan in place and ensuring that there’s an appointed person who’s responsible for maintaining, updating, and enacting the plan. In the Northeast, we’ve seen everything from flooding and ice storms to cyberattacks over the last year. The ability to quickly get back on your feet is key to weathering any disaster.
Financial Planning and Measurement
As grosses have started to shrink, it’s important to plan and prioritize how that money will be spent. The first half of 2024 has seen the full resurgence of advertising and floorplan interest expense, and these items, which have been far below historical levels since 2020, are once again taking a significant piece of that now diminished gross. Coming up with forecasts and budgeting what you want to spend on a PVR or absolute basis, then holding your team accountable for hitting those targets, will be crucial to maintaining healthy operations. Inventory management and optimizing turnover will be another key to success in the latter half of 2024 and going forward. Dealers that can be strategic and disciplined in their approach to inventory and expense control will be better positioned for future success and riding out any downturns.
Customer Satisfaction and Employee Development
Well-trained employees make fewer mistakes, are more engaged, and create a more positive customer experience. By investing in your employees and developing your team, you can give them the skills they need to be successful and help keep them engaged, which is a powerful tool for retention. It’s expensive and inefficient to continually retrain new employees. By reducing dealership turnover, you can save money and help ensure you have a knowledgeable and skilled team working with your customers. As competition increases and bottom lines are reduced, it’s important to make sure you’re getting the most out of your sales opportunities. Failing to close on leads or having comebacks in service diminishes the customer experience and negatively impacts both current, and potential future, sales.
None of these items are necessarily new or novel concepts but represent more of a return to the fundamentals of running a successful business in a highly competitive industry. General economic conditions, pressure from OEMs, and intense regulatory scrutiny are all challenges faced by auto dealers, so it’s important for them to be on their toes and make sure they aren’t overexposed at any given time. Finding new ways to implement and embrace technology and thinking outside the box are still important for growth, but we see a return to the basics, with active monitoring and oversight of performance, as the pillar to safeguarding your financial resources. Dealers that are able to embrace this approach and remain disciplined will be those best positioned for continued success.
For further guidance on safeguarding your dealership’s financial position, consult your financial services advisor.
Matthew Marcoullier is a director at ARB. He focuses primarily on financial accounting and consulting services for auto dealerships, commercial businesses, and closely-held businesses. Matt previously served as a Senior Auditor for the State of Maine Department of Audit.
