You Can Make Budgets Work

“You can’t get there from here.” How many times have we heard that? We still try. The fact is, we do eventually get there, but it is often not from here. Why?
Well, first of all, we don’t have a road map. We have general goals but have not provided details of what is needed to achieve them. This is especially true when developing an operating budget for your dealership.
From the field, the common belief is that the boss pulled a number from her ear. As the boss, you know that this is what you need to achieve economically. But neither of you has thoroughly examined the incremental steps necessary to reach the target.
As a wholesaler in Arizona used to say, I work each day to have a good day. Five of those in a row and I have a good week. Four of those, and I have a good month. And if I am lucky enough to have 12 good months, well, I have a good year.
What you have here is a basic bottom-up plan for success. While your business success is more sophisticated than “having a good day,” much of it comes down to having the right people and tools in place to achieve it. Let’s look at Service, for example.
Service is a function of available hours and the ability to sell those available hours. But how many hours do you actually have available? The quickest way to be disappointed with the results is to take the number of technicians you have and multiply by 8 or 10 times the number of days you are open.
Let’s assume you have 15 technicians. Each technician is there 5 days a week. You are open 6 days a week. Would it be prudent to multiply 15 * 8 * 26 working days (3120 hours), or more accurate to multiply 15 * 8 * 22 working days (2640 hours)? Assuming your effective labor rate is $80 per hour and your Gross Profit percentage is 67%, The difference in your projection is $25,728 in Gross Profit per month or $308,726 per year. A miss like that is substantial.
Yet, we still have not taken into account vacations and training. Your 15 technician staff may have an average vacation of 2 weeks and may spend another 1 week per technician average in training. That calculates to 45 man weeks that you are short. Assuming 8 hours per day, that is 1,800 hours per year or $96,480 in Gross Profit you have to account for.
So, let’s look at a quick projection:
Days | Techs | Hrs / Day | ELR. | GP% | GP/Year | |
Month | 264 | 15 | 8 | $ 80.00 | 67% | 1,698,048 |
Vacation | 10 | 15 | 8 | $ 80.00 | 67% | (64,320) |
Training | 5 | 15 | 8 | $ 80.00 | 67% | (32,160) |
Net | 249 | 15 | 8 | $ 80.00 | 67% | 1,601,568 |
Difference | $96,480 |
While this may seem small—only a 5.68% miss—it is $8,000 per month in Gross Profit. And, assuming you keep 65% of your Service Gross Profit, it is the $62K net you are expecting but may not be getting.
Let’s add the parts portion to this. Assuming no appreciable wholesale or accessory activity, your gross profit on parts should be approximately 50% of the service gross profit. Now you are talking about a $144K shortfall in Gross Profit expectations and $94K in net.
This is just a quick example of what happens when we forget to factor in the people side of the equation. And this is only for Service. What happens when we consider sales?
In sales, the producers are the most common variable we overlook when setting objectives.
We set goals of 120 units per month and then try to achieve them with eight (8) salespeople. Inevitably, we fail. Once again, why?
Unless we are working with all superstars, the average production per salesperson will be between 8.5 and 10 per month. Having established this, how will you get to 120 with only eight salespeople? You are not.
At best, you may get 90 or 100, but you will likely get 64 to 80. Once again, vacation and training have not been considered.
So instead of getting 120 units @ $2,000 front and back, you get 80 units @ $2,000 front and back, which leaves you short $80,000 in gross for the month or about $24,000 in net.
That is $250K per year.
So what is the solution?
By examining your business’s building blocks, you can easily develop a plan for success that you and your team can agree on. The following is a listing of those building blocks.
Sales Operations | Service Operations |
Number of Sales People Available | Number of Technicians Employed in the Dept |
Average Cars Sales per Sales Person | Number of Training Days Per Month |
New to Used Ratio (% of Used to New) | Number of Vacation Days Per Month |
Percent of Used Cars that are “C” or Thrift units | Shop Efficiency Percentage |
Average Gross Profit New Vehicle Retail | Customer Pay Labor as a % of Total Labor Sales |
Average Gross Profit Used Vehicle Retail | Warranty Labor as a % of Total Labor Sales |
Average Gross Profit “C” Car Retail | Internal Labor as a % of Total Labor Sales |
Wholesale Profit Per New and Used Vehicle Retail | Effective Labor Rate – Customer Pay Repair Orders (RO) |
Percent of “Sales” Delivered | Hours per RO Customer Paid Labor |
Percent of “Demos” Sold | Effective Labor Rate – Warranty Repair Orders (RO) |
Percent of “Ups” Demo’d | Hours per RO Warranty Labor |
Average Advertising (gross) per vehicle retail (PVR) | Effective Labor Rate – Internal Repair Orders (RO) |
Pay Plan % of Gross Profit | Hours per RO Internal Labor |
Average Sales Salary | Customer Pay Labor Gross Profit as a % of Sales |
Percent of “mini” / flat commissions New | Warranty Labor Gross Profit as a % of Sales |
Percent of “mini” / flat commissions Used | Internal Labor Gross Profit as a % of Sales |
Average “mini” / flat commission | Sublet Sales as a % of Total Labor Sales |
Average “Spiff” PVR | Sublet Gross Profit as a % of Sales |
New F&I income PVR | Parts Department Operations |
Used F&I income PVR | Parts to Labor Ratio Customer Pay ROs |
Days Supply New Units | Parts to Labor Ratio Warranty ROs |
Days Supply Used Units | Parts to Labor Ratio Internal ROs |
Average Inventory Cost Per New Unit | Customer Pay Parts Gross Profit as a % of Sales |
Average Inventory Cost Per Used Unit | Warranty Parts Gross Profit as a % of Sales |
F&I Comp as a % of F&I Gross Profit | Internal Parts Gross Profit as a % of Sales |
Sales Management Comp as a % of Sales (without F&I) Gross Profit | Retail Counter Parts Gross Profit as a % of Sales |
Support Comp as a % of Sales (without F&I) Gross Profit | Retail Counter Average Daily Sales |
Other Expenses | Wholesale Parts Gross Profit as a % of Sales |
Adv Credits PVR (if applicable) | Wholesale Counter Average Daily Sales |
Flooring Charge Rate | Gas, Oil & Grease Gross Profit as a % of Sales |
Delivery Exp PVR | Gas, Oil & Grease Average Daily Sales |
Policy PVR | Tire & Wheel Gross Profit as a % of Sales |
Inv & Maint PVR | Tire & Wheel Average Daily Sales |
These are the metrics that drive our business. Many of them are second nature—common sense—to you, but because of that, you fail to incorporate them into the budgeting rollup.
You have the opportunity to develop your managers, to bring them into the cycle of making commitments, and to give them a good foundation for the commitments they make. Much like sales are a result of following the steps to the sale, attaining your budget is about knowing what you need to do to accomplish each line item. It is essential to start with the end in mind, but it is also vital to help them build a path to success by assisting them in understanding the individual bricks that make up the path.
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