By Spader Business Management
If you’re like most dealers, the prospect of working on your annual budget is not exactly exciting. It feels like busywork, unrelated to the actual operation of the dealership, almost a form of punishment. For some dealers, spending several hours working behind closed doors on the budget can be summed up in one word: painful. After all, what you are good at is running a business – not playing around with numbers in the office!
Every year around this time we hear some version of that. And that’s a shame.
Dealers who take their budgeting and profit planning processes seriously enjoy improved business results, better personnel management, and increased agility in changing business climates.
We use the term “budgeting” for the creation of a detailed game plan that results in a specific profit outcome.
Profit planning is continual monitoring of that game plan, and the implementation of changes as needed to meet or exceed established profit targets.
Establishing the budget and profit plan should not be viewed as a low-level formality, to be avoided as long as possible, or delegated to the accounting department; but instead it should be considered one of the most important annual activities for top management of the business.
When looking at financial results and wondering if they are good or bad, you may ask, “Compared to what?” Compared to other dealers? Maybe. But what if those other dealers have specific advantages (or inhibiting factors) that make comparisons impossible? Compared to some national averages? Possibly, but what if dealers included in that average are in a really hot (or cold) market areas? Or carry significantly different products than we do?
While there is clearly value in benchmarking against other businesses, the first thing you should compare to is the budget. The budget sets the dealership’s priorities, the risk levels, the staffing levels and results goals of all employees, and – importantly – the inventory levels of the business. In its highest form, a budget is the deliberate annual strategic plan of the dealership, detailed and carefully thought through, so it is the most important guide to answering the question, “How are we doing?”
This is not just an academic exercise. Only by knowing where you are in comparison to your budget can you make timely changes and adjustments to your inventory and staffing levels to maximize profitability, or minimize potential shortfalls. Without an annual budget broken into seasonalized monthly pro forma results, the dealership’s management team is essentially wandering around in the dark, hoping for the best. And while this approach may work in favorable markets, it is deadly in turbulent times.
But a budget has even more value than that. By allowing staff to participate in creation of the budget, you drive accountability downward, and create ownership in the results. For instance, every salesperson in your dealership plays a critical role in the overall goals of the department – and they should know it. If your overall sales department budget calls for 700 units next year and you have seven salespeople, they should each be aware that they are responsible for roughly eight deliveries per month, adjusted for seasonality.
Now you have a standard that is clearly known and to which each salesperson can be held accountable. This type of goal-setting can and should be driven down to every employee on a variable pay plan – sales and service managers, service writers, parts sales associates, even technicians. By becoming part of the planning process, employees become acutely aware of their responsibility for the outcome.
While of course business is a constant continuum, it is important to set down some markers for when we are going to stop and measure how we’re doing and where we are headed if we stay on the same path. This is perhaps the most important value of a properly-prepared annual budget. A formal analysis of what really happened, in comparison to what we thought was going to happen, challenges us to confront not only our markets and brand choices, but also our internal abilities to actually generate the results we need. Do we have the right people in the right places? If so, what training and mentoring do they need to improve? If not, what are we going to do about it? Are our systems and processes really functioning the ways they should? Or have we let some bad habits dampen our effectiveness? Importantly, is our inventory clean and purged of old-age problems – or if not, what is the plan to deal with it?
In these good markets, it can be easy to forget that sometimes the most basic tools of business are the most important. The creation of a quality annual budget and profit plan, broken down to monthly goals and deviations, is without a doubt one of the most critical business activities for any organization. But when things are good, the penalty for not having one can be masked by the growing market. If things change, however, those with good budgeting processes will be rewarded handsomely … at the expense of those without them.