Third quarter is almost over and only four months left to go in 2011 before we close the books. Hopefully sales are up over last year and growing. How is your profitability year to date? Are you meeting your profitability targets for 2011?

If you are like most dealers this year, you have been cautious about adding headcount, and trying to keep your expenses down. The key question to ask as we near the completion of 2011 is this…are you meeting your profitability plan for the year? Some of those increased expenses are expected and will correlate well with increased cars sold and serviced. But how many of those increases in expense are consumption related? Are supplier price increases driving your costs? Are suppliers putting new contracts and agreements in front of you with built in price increases once again?

Most dealers use a prescribed set of metrics, percentages and formulas to drive their top line and bottom line performance. There are 100+ expense categories for dealers to manage on an on-going basis. The degree of management and controls within each of those expense categories can make or break your profitability if you operate on thin margins.

Opportunity

Based on our experience, dealers will spend up to 4% to 6.6% of their top line revenues on the 100-plus expense categories that are controllable. Based on our benchmarks, dealers should be able to reduce those costs by anywhere from 18%-22% with some planning and sourcing management. In most dealerships, that is at least $250,000 a year and up once your strategies has been employed and implemented.

Top line sales = _____________

x 5.3% cost reduction average =____________

= Avg. annual expenses for services/supplies____________

x 20% cost reduction opportunity

= Opportunity to reduce costs/improve annual profitability_____________

Now, consider what that profitability number looks like over three years and five years, the results can be compelling. Services and supplies from paper clips to insurance to motor oil credit bureaus to vehicle history reports and much, much more make up a growing list of expenses to support a dealership business. So, how does a business improve their expense management planning process to meet and exceed profitability targets?

Expense management planning

To plan for profitability, you need to set a budget or a plan. In order to set a plan or a budget you must first know what you are spending in those categories today.

Category expenses can be retrieved from your DMS system. Follow the below listed steps to generate your expense management plan:

• Generate a 12-month spend extract for all vendors based on all A/P and on demand checks and credit card spend(try running a 1099 report to generate the data).
• Export the data (A/P, on demand checks and credit card spend) to Excel.
• Insert a column into your report for category coding which you will need to accomplish by supplier.
• Code all suppliers based on their different respective industries – not G/L codes.
• Delete all out of scope, government, auto pay-offs and charitable contributions – some expenses cannot be planned for or cannot be negotiated.
• Sum up all like category codes for a sub-total.
• Insert category spend data into an excel worksheet.

If you have accomplished the above, you now have an expense management planning tool that you can utilize for years to come, just update the annual spend numbers each year, set your new targets and you will have a plan that can be managed to achieve or improve your profitability working from the ground up.

If you embark on this project and cannot generate a supplier spend report, I can connect you with a couple of suppliers that can assist.

Developing a strategic expense management plan

With your new excel based expense management plan in hand, you can now enhance it to become a living management tool with all sorts of capabilities.

• Insert columns into the worksheet to enable you to assign personnel responsible for cost reductions, to manage start dates, end dates, targeted savings, contract end dates, cost reduction results, etc.

Utilization

The expense management planning tool becomes a multi-purpose tool that will help your organization with expense planning, staffing levels for sourcing and audit work, and your performance to plan along the way. The savings you generate in each expense category should be measurable and auditable and inserted into your worksheet to measure your progress. Net, net…with an active management approach, a plan using good solid data, you should be well on your way to understanding your costs and taking the next steps to improving profitability.

Summary

Healthy profitability doesn’t just happen, it is the result of focused management attention to many aspects of your business as you know. The more data you have and the more focus you apply, the better the results. As they say: what gets measured, gets improved.

Mapping your current expense structure for services and supplies is a good first step in collecting the right data and usually represents between 4% to 6.6% of your company revenues. Opportunities to reduce those costs typically average 18-22% of your spend for most dealerships. Those cost reductions can flow to your bottom line as profits and new profits. Over one, two and five years, with focused attention, the results can be pretty dramatic and compelling. The first step to success and increased profitability is to lay out your spend data and create your expense management plan.

If you are interested in receiving a copy of a category coding list and an expense management template in excel, contact Doug Austin via e-mail at: daustin@dealer-communications.com. I would be happy to send you these tools to get you started on your expense management plan.