by Mark Sheffield
Back in 2009 when I joined my first Spader 20 Group as a client, John Spader made me aware of how important the budgeting process is. A solid budget can help to identify weakness in the operation, it provides monthly benchmarks for management, and it works in tandem with your inventory management plan. When most dealers are asked to build a budget, they just look at what they did last year, add some random percentage (hopefully positive) to those numbers, and that’s the budget. But if your prior year wasn’t a very profitable one, then all you are doing is magnifying problems, and increasing your risk factor should we see another economic downturn.
There is a better way. Instead of a top-down budget that isn’t “owned” by the departments, what if your managers were responsible for building the budgets for their own departments, and they were held accountable to them? What if your budget helped to determine how much new unit and parts inventory you need? Wouldn’t it be great if your budget defined your staffing requirements for the coming year, as well as compensation packages? It’s possible, and it’s not that hard.
Let’s look at a simple process for the three main departments. For each one of these you are going to want to make a spreadsheet with a column for each month of the year. We’ll also need access to historical data for the last few years (if it’s available).
Sales and F&I Departments
In the sales department, we want to outline how many new and used units we are going to sell each month. The historical data is going to provide some guidance, and then we’ll need to factor in the availability of new product from our vendors. In most industries, prices increase about 2 to4 percent each year, so account for that when determining what the average sales price is going to be during each month. We can also use the historical data to determine our monthly margins, and what we expect those to be for the coming year. If the margins are going to increase, then now is a good time to ask the questions about what we are going to do to make that happen. Will it be a different product mix, more training, or something else? In no time at all we’ve come up with our top line sales budget.
The sales department budget also defines what we’ll do in the F&I department. Based on the number of units we plan to sell, multiply the F&I PUS (Per Unit Sold) goal by the unit count to determine your monthly goals. Or, you can calculate F&I as a percentage of the sales volume to generate monthly targets.
Service Department
Some labor sales are going to be a direct reflection of what we planned for in the sales department (prep, PDI, rigging, accesorization, and warranty), and the balance of the service income is going to be customer pay. Take your spreadsheet and do the math to see how much labor the sales department will drive each month, and then use your historical data to see what you’ve done in the past for customer pay work. If we are shooting for an increase in the coming year, then is that coming from additional techs, efficiency increases, or an increase in the labor rate? Service top line, done!
Parts Department
Our sales and service budgets become the foundation for our parts department budget. Depending on product type and mix, and the strength of our sales and parts associates, we’ll sell a certain dollar amount in parts and accessories with each unit. We should also sell between 80 cents and a dollar of parts for each dollar of labor. Now we just need to figure out the over-the-counter sales for the coming year (history helps with this), identify the margins for each category of sales, and that’s our top line budget for the parts department.
Other Departments
If you have other departments in your dealership, such as rental, storage, or a body shop, then use the same methodology.
Expenses
Depending on the structure and size of the dealership, your managers may or may not have control over expenses. Regardless of responsibility, it’s good to budget for those items. Except for fixed costs (rent and utilities) most expenses are going to be easy to calculate as they will be a percentage of your gross margin (not gross sales) in each department. Go back and look at your historical data for the last three years, and you will see what I am talking about. If you are a member of a Spader 20 Group, you already know what those guidelines are for your industry, and for the top 20% of the most profitable dealers in the industry.
Inventory
Since we have calculated our sales and margins for the sales/parts departments, all that’s left is to select our targeted turn ratios and then we have our monthly inventory targets. Now that each department has monthly goals (and assuming we have a rough idea of what each employee is capable of) now is the perfect time to check and see if we have enough (or in some cases too many) staff to achieve our goals.
For the most part, that’s it. In a day, most dealers can build a budget/profit plan that will be a road map to success for the coming year. If you aren’t happy with the bottom line, there’s no better time than now to make an adjustment. There are three options for improving net profit: increase sales, improve margins or reduce costs. You can either be proactive and go into the coming year with a plan to be profitable, or you can do an autopsy when the year is over to determine why you didn’t make any money. The ball is in your court.
Mark Sheffield is a Spader 20 Group Facilitator.