Dude, Who Took My Profit?

While it's true that you can't save your way into a profitable position, you can ensure that you are minimizing any excess or unneeded expenses. A few years ago during a 20-Group meeting, a dealer presented a winning idea entitled Process Evaporation. He listed the processes he and his management team had put in place at his dealership over a period of time. But he added that many of them were no

While it's true that you can't save your way into a profitable position, you can ensure that you are minimizing any excess or unneeded expenses.

A few years ago during a 20-Group meeting, a dealer presented a winning idea entitled “Process Evaporation.”

He listed the processes he and his management team had put in place at his dealership over a period of time. But he added that many of them were no longer being adhered to. Thus, the title: Process Evaporation.

This idea hit home personally. I've often thought about all the time and effort that I (and my management teams) have invested into establishing processes only to look up one day and find that we were no longer following our own road map.

I just read an article “Is the Automotive Bull Run Over?” written for The Motley Fool by John Rosevear. He recalled a conversation with Ford CEO Alan Mulally last fall in which Mulally spoke with relish of the opportunity Ford would have once the seasonally adjusted annual rate exceeded 14 million sales.

Ford (like the other Detroit auto makers) was solidly profitable during economic booms, but was a money-loser during recessions. One of the goals of Ford's turnaround plan was to lower the company's break-even point far enough that it could stay profitable (or at least, not lose money) during harder times, something that Ford executives felt was critical to the company's long-term survival.

In the not too distant past, most dealers I know were hard at work establishing plans to lower their break-even points and installing processes that would eliminate any nonessential expense.

If today, I were to have that same conversation with those same dealers, would I still find those processes they put into place then to ensure they were “clean”?

Franchised dealers are seeing increased profitability as the auto industry recovers from the recession. Paul Taylor, the National Automobile Dealers Assn.'s chief economist, says, “The net pretax profit as a percentage of total dealership sales in all departments was 2.1% in 2010, up from 1.5% in 2009, and the highest since 1986.”

This reminds me of a question I often have asked dealership managers regarding expense management as it relates to net profit as a percentage of sales:

“If my dealership has a 2% net profit as a percentage of sales, how many dollars in sales must I generate to cover a $100 expense?” The answer is: $5,000.00.

Take the expense dollar amount and divide it by your net profit percent of sales. There really is a rationale behind conducting this exercise.

In many dealerships, if an employee, especially a manager, asks to spend $100 for something, the chances are it is approved more quickly than it took me to write this explanation.

But, prior to approving the expenditure, let's consider asking the manager this question: “How do you plan to generate $5,000 in sales to cover this expense”?

What would his or her reaction or answer be? My point: As I've stated in numerous articles, we need to educate our management teams on expenses. I have found this one exercise particularly effective in helping accomplish that.

No, the train hasn't jumped the tracks, but we certainly aren't back up to full speed either.

We aren't going to wake up one magical morning soon and find that we, as dealers and an industry, are back on track to sell 14 million units.

It's going to take time, but we will eventually get there. In the meantime, in our own individual dealerships, we have to ensure that the processes we found essential enough to put into place have not evaporated.

Remember the old adage: “Each dollar of excess expense is a dollar of net profit lost.”

Good Selling!

Veteran dealership consultant Tony Noland is at [email protected]

TAGS: Dealers Retail
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