As many of us have learned over the years, “What you measure is what you get.” However, traditional financial accounting measures can give misleading signals. They measure the past, but don't provide indicators for the future.
Traditional measures don't indicate how well the dealership is doing in the areas of continuous improvement and innovation, key factors in today's competitive marketplace. To measure financial performance and other areas of business performance, a manager needs a “balanced” presentation of financial and operational measures.
Key to a successful dealership is a profitable parts department. That department must also produce strong cash flow and meet customers' current and future needs.
Keith Ely, one of our senior consultants, has developed a “balanced scorecard” for the parts department. I'd like to share its details with you. The scorecard must be consistent and complement the overall dealership's long and short-term strategies.
The parts department's balanced scorecard provides financial measures that indicate performance of actions already taken in combination with operational measures that drive future financial performance.
Waiting on the monthly financial statement is not enough. Using predictive measures that can focus attention on upcoming events and provide insights into their probable impact on future performance can reduce reactive management (I call this fire fighting) and increase proactive management.
These factors measure such areas as customer satisfaction, internal processes, and department innovation. There should be no more than 15-20 total measures (4-5 measures per category).
The balanced scorecard consists of four key areas:
It answers: How well are we performing financially? How does the customer perceive us? How well do we operate? How well are we improving operationally?
The parts department's balanced scorecard brings together many areas, including inventory management, gross profit, productivity and customer enhancement.
When developed and used properly (typically daily or weekly), the scorecard projects future performance of the parts department. For example, if special orders increase, increased obsolescence will typically increase in the near future as well.
By using the scorecard approach, management can take proactive action immediately. This approach forces them to see whether improvement in one area has been achieved at the expense of another.
This month we'll discuss financial, the first of four key areas of the scorecard.
Financial measures indicate how well serving the customer, improving the operation of the department and enhancing the knowledge and services of the department have increased the profitability and cash flow of the parts department.
Financial measures are lagging indicators. That means they are the end result of processes and decisions of management. They do not tell the future, rather they give a history lesson. Financial measures are the typical accounting measures that dealerships currently use.
The financial category focuses on the performance of the department and targets key areas of importance to departmental and dealership management.
These measures could include:
- Net return on inventory
- New as % of gross profit
- Gross profit as % of sales
- Personnel expense as % of gross profit
- Growth in sales
- Accounts receivable and inventory aging
- Parts inventory aging
- Parts inventory turns (gross and true)
Next month we'll cover the other three areas of the balanced scorecard.
Don E. Ray is a CPA with the DixonHughes Dealer Services Group. He's at 901-684-5643 and [email protected].