I was asked to work with a dealer group and when I inquired about what subjects they’d like to cover in my presentation, the response was: “Let’s discuss how we get to 30% net to gross.”
The net-to-gross ratio is used to determine the amount of profit made compared with the operating costs. While 30% net to gross is not your ultimate destination, it will separate you from the pack and help your organization explore its capabilities. A dealer recently asked at a meeting: “Isn’t today’s 30% net to gross now really 40%?”
Good question.
After working with and learning from hundreds of successful dealers, I will share what I’ve witnessed and learned from them.
A common characteristic 30% net-to-gross dealers share is that they run a process-driven organization. Their internal processes are thought out and consistent. All employees are expected to adhere to them.
The easy part is that these dealerships consistently produce gross. As simple as this may sound, there certainly is more to it. Generally, these high performers have an employee turnover rate that’s lower than the industry norm. A lower turnover rate equals higher gross profits.
Ford’s operating report has a section that tracks salesperson and service adviser tenure. Many times during my career, I’ve monitored Ford dealer clients with the highest percentage tenure and, not surprisingly, they also were the most profitable.
If we want our bottom line to be 30%, then our expense budget cannot exceed 70% of total gross.
If 70% is our expense budget, it is important that each expense category (variable/selling expenses, semi-fixed/operating and fixed/overhead expenses) be assigned a budget in total.
For example, if your selling expense budget is 32% of your total dealership gross, then only 38% remains to cover the other expense categories. Now, within these categories, each individual expense (i.e. salesperson compensation) is assigned a budget that’s managed and monitored monthly.
Since personnel expense, including taxes and benefits, is the largest expense item, it is important to structure your dealership for gross while minimizing this expense as a percentage of gross. I’m certainly not suggesting you cut your personnel pay; far from it. I don’t care what the dollar amount of your personnel expense is as long as the percentage remains in line.
One of the more important measurements is your revenue-producing personnel as a percentage of your total personnel count. At absolute minimum, 55% of your total personnel should be revenue producers.
Those people are your variable sales personnel, finance and insurance managers, service advisers, body shop estimators, technicians and retail and wholesale parts salespersons. In many dealerships, vehicle detailers are in that group.
Monthly gross is not consistent, but it’s important that our expenses as a percentage of that gross remains consistent.
I see cases where dealerships have, for example, increased their gross 5% over previous years while their expenses may have increased 6% or 7%. The questions then become, where have we dropped the ball and what steps do we take to correct this situation?
Here are other common traits 30% net-to-gross dealers share:
- High management and employee accountability for individual and department results.
- Monthly reports charting results in key areas.
- A productive personnel count at least 55% of total employees.
- Above average grosses for vehicle sales and fixed operations.
- Higher than average monthly gross per employee.
- Consistent employee-training programs.
- Balanced and consistent gross contribution by individual operating departments, as well as strong fixed and sales operations.
- Strong used-vehicle operations.
- High emphasis on expense management.
- High customer- and employee-satisfaction ratings.
- Good asset management with a consistent focus on inventory turn and receivables.
This list is not all-inclusive. I hope it serves as a reminder for those who want to stay in this elite club, as well as an inspiration for dealers who want to join it.
Good selling!
Tony Noland of Tony Noland & Associates is a veteran dealership consultant and former dealership manager. He can be reached at tonynolandandassociates.com.
