Dealerships juggle multiple moving pieces to ensure daily success. From fixed ops to variable ops and everywhere in between, dealership owners have much to plan, track and navigate daily. Successful dealers understand that big-picture review is critical for improved operations, growth and profitability. They know that when all its parts are operating at peak performance, the competitive edge is theirs.
But where do you start? You begin by reviewing your factory financial statement. This amazing tool is loaded with information that, when properly utilized, can help a dealer closely monitor each of its departments.
Many operators become so entrenched in day-to-day happenings that they don’t take time to step back and consider crucial business benchmarks and KPIs that can help improve operations and profitability. Besides lack of time or focus, some dealers have simply never been taught to read the factory financial statement effectively, so they stay in the rut of the status quo.
That was a symptom recognized by a successful Rocky Mountain dealership that called upon Eide Bailly to bring a fresh set of eyes to their accounting department with a Dealership Diagnostic Check.
Just like a dealer offers a vehicle diagnostic check to ensure their customers’ vehicles are working at peak performance, Eide Bailly’s multipoint financial inspection does the same for dealerships.
What We Found: Employee Classifications and Overtime
In performing a diagnostic review for this dealership, we recognized that “Other Salaries & Wages” expenses per the factory financial statement were out of line with industry standards. As we worked with the dealer to gain more insight into this concern, we discovered that the cause of the higher expenses was primarily the result of employee classifications and overtime.
In an effort to resolve these two issues, we started by working with the client to determine the correct department and account to categorize employees. For example, a clerical expense that was charged to “Other Salaries and Wages” was re-mapped to a separate clerical expense account.
Regarding the overtime reporting, the dealership appeared to be properly staffed, so there shouldn’t have been a need for so much overtime. After further investigation, we were able to determine that, with proper management, the overtime could be (and was) eliminated.
While this only saved the dealership a few thousand dollars, the final result of the diagnostic was the proper categorization of employee salary expense, which gave the dealership the ability to quickly identify excessive salary costs. Additional internal control measures were put in place to assist the managers in helping to identify and control overtime. Performing a Dealership Diagnostic is a powerful starting point for affecting the bottom line.
What We Found: Parts Inventory
As is often the case during the process of the diagnostic check, we discovered more: an unusual adjustment in the parts inventory account. The days’ supply of parts inventory was above industry benchmarks standards.
When our dealership advisors discussed the issue with the owner, he confirmed the parts inventory appeared to be outside the dealership norm. We then recommended a physical inventory count be performed on the entire parts inventory.
As a result, it was discovered that inventory was overstated by $60,000. We then worked with the dealer to institute new procedures that would more accurately monitor the parts department inventory. The dealership also implemented a regular cycle count of parts bins. Furthermore, we recommended they use a third party for the physical parts at least every two to three years and provided vendor options to the dealership.
What We Found: Warranty Labor Rate vs. Customer-Pay Rate
Lastly, in reviewing the factory financial statement, we noted the reported warranty labor rate was low compared to the customer-pay rate. The owner was aware of the difference but didn’t have the resources to make the applications necessary to get approval for a higher rate.
Eide Bailly assisted with performing an Effective Labor Rate analysis and submitting the application to the factory. The dealership was successful in obtaining a labor rate increase of nearly $10 per hour, resulting in an immediate increase in warranty labor gross profit.
At the completion of the Dealership Diagnostic, not only did they make critical adjustments to more accurately provide a true financial picture of the dealership’s health, but the dealer took advantage of more than $21,000 in tax savings thanks to the provided advice. These actions led to improved operations overall, as well as more opportunities for growth.
When to Work with a Professional
While some dealers think they already undergo various financial reviews, leveraging the experienced dealership advisory team at Eide Bailly to bring a multipoint review approach to optimize your dealership operations can have profitable results and provide a clear and accurate financial picture of your dealership health.
Glen McMahon helps to lead Eide Bailly’s dealership consulting practice. With more than a decade’s experience in centralized accounting, internal auditing and report building, Glen helps dealerships streamline, simplify and automate dealership accounting functions. Glen’s extensive expertise in financial analysis and CDK/ADP DMS has saved some of the nation’s largest automotive dealerships and single-point stores both time and money.
