SERVICE & PARTS: More Gross Or Less Expense To Obtain Profitability?

Transcription

1 JUN E 2013

2 DEALERSHIP INSIDER / June 13 SERVICE & PARTS: More Gross Or Less Expense To Obtain Profitability? Are you wondering how you can increase your parts and service departments net profitability? Some of the factors that affect profitability are sales, cost of sales, management and technician s abilities, number of technician stalls available, number of hours each technician turns, and expenses. Gross profit is simply sales less cost of sales. Sales are generated from customer retail, warranty and extended warranty, sublet, internal and maintenance repair orders. Cost of sales has a direct relationship to sales. In service, it is the technician s cost per hour they are paid, either in hourly, salary, or flat rate time. In parts sales, it is the cost of the parts you purchase for the repair order. Management s ability plays a key part in profitability. If your technicians are not supervised, if repairs are not scheduled properly among the techs, if customer follow-up is not a high priority, etc., then service and parts will have a lower chance of being profitable. Technician s ability, number of stalls available and the number of hours each of your technicians produce will greatly affect your ability to be profitable. You can have too many stalls for your current sales, which increases your overhead unnecessarily. Too few stalls will result in not being able to complete all the work you have available, resulting in unhappy customers, retail and/or internal (yourself), and unnecessary expense moving vehicles in and out of the shop before the repairs are completed. If your techs are not trained properly, or have too few years of experience in ride, drive and diagnostic capabilities, the number of hours sold will be below what would normally be produced in most profitable repair shops. If you do not concentrate on up selling, which is normally generated from inspecting the customer vehicles when they arrive at your shop for maintenance or repairs, your average hours per repair order will also suffer. Check to see how many one line repair orders you have generated over the last three months. Most were probably oil changes and you may have been so busy you did not have or take the time to perform adequate inspections of the vehicles to recommend further service while it is in your shop. The amount of maintenance type repairs is increasing because vehicles are lasting longer. With this in mind, you need to market yourself similar to the way the other maintenance shops in your town are promoting themselves. You have to have competitive pricing, tiered pricing based on the type of repair, loss leaders, etc, if you are going to get your fair share of the business. Customers still seem to think dealerships are much more expensive places to get their vehicles maintained than the smaller shop down the street. It is up to you to dispel this thought. Charging retail prices to yourself for all internal sales is also very important, since you are your own best customer. Your managers and sales people will argue that it can be repaired cheaper down the street at another shop and you are cheating them out of potential gross profit. The only answer I would give them is this: When your name is on the building, you can take it down the street to repair the vehicle. Until then, retail prices from our own shop will be charged to the vehicles for reconditioning and detailing. This only makes sense as your service and parts gross profit help cover a tremendous amount of your total overhead. For internal repairs, the minimum service labor gross profit should be 70%, sublet repair should be 15% and parts gross profit should be at least 40%. I have yet to see where increasing the internal gross profit from substandard grosses to the minimum grosses described above, reduces the commissionable gross profit that sales commissions are based on. Normally, we see when internals are priced to achieve the above minimum grosses, the average gross profit on the vehicle increases. Now, what do you do to have profitable parts and service departments? Increasing sales, lowering cost of sales and expenses, having the right managers and fully trained techs with the right number of stalls available to maximize the hours your techs can turn, will all result in a higher net profit in the service and parts departments. Expenses are a large part of your key to profitability in parts and service. You can generate all the gross you want, but if you don t control your expenses, the gross profit can be overwhelmed, leaving you with little or no net profit. Fixed expenses are expenses that are not directly tied to the production of sales, such as rent, utilities, telephone, administrative salaries, employee benefits, real estate taxes, data processing, legal and accounting, depreciation, owner(s) salaries, payroll taxes, insurance, etc. For example, rent would not normally increase just because you sold a few more cars or produced extra repair orders in a month. Selling expenses are those directly related to the production of sales, such as service advisors pay, payroll taxes, absentee compensation, shop supplies, equipment repairs, advertising, training, data processing, uniforms, health insurance, workman s compensation, etc. Paying your managers and techs bonuses on how well expenses are controlled can help you achieve lower expenses that may not necessarily increase as your sales increase. Since net profit is the ultimate goal you want to achieve, then expense control is just as important as producing gross profit. Normally you should generate approximately $1 of service sales for every $1 of parts sales. The combined average gross profit will be approximately 50% of every dollar in total parts and service sales you generate. For example, if your total combined sales are $50,000 per month, you should generate approximately $25,000 in gross profit. To be profitable, your expenses would have to be less then $25,000. How profitable, depends on how well you manage your expenses. Remember, to produce $1 of gross profit you have to generate $2 in sales, while saving $1 of expense achieves the same result. Try both. *Cover Photo Credit: Maksim Toome

3 HOW TO MANAGE YOUR ONLINE REPUTATION: New Media Demand Fast Responses To Critics Car shoppers today can find valuable information on your store through a quick Internet search. That s the good news. But they also can find harsh sometimes devastating words from disgruntled customers who have a bone to pick with you, whether legitimate or not. Savvy dealers are proactive about doing what they can to help make sure that what potential customers see about their dealerships online is favorable. ONLINE WORD-OF-MOUTH Specialized rating and review sites, such as Edmunds, DealerRater and Car Dealer Check, and general ones, such as Google, Yahoo!, Angie s List, Citysearch and Local, are the new recommendation-giving neighbor next door. Potential customers visits to any of these sites can quickly include or exclude you as a possible place to buy their next vehicle. This is what car shoppers recently could read about one dealership on a review site: The salesman/owner was very deceiving. He led me to believe that I was purchasing a car from him with a seven-month warranty. But upon signing the paper work he said it was with another company, and it was just for the engine and transmission. Uh hello, [the factory] gives you 100,000 mile engine and transmission warranty so he really gave me nothing. Worse than the bad review itself, the dealership received a one-star rating, because this was the only review about the business on the site. And there s no way to know if the complaint was justified! PROACTIVE MEASURES There are reviews out there more scathing than the example above, and one of them could be about your dealership. So, what can you do to minimize negative repercussions? First, you need to find out if bad reviews exist. Some sites let you arrange for notification if your business s name is used in a review. A Google alert, for example, will inform you when your dealership s name is mentioned in a review, blog or online article. YOUR RESPONSE Once you ve spotted a bad review, the proper response is critical. Although it s ideal to respond to an angry customer immediately, take a break from the situation if you feel the criticism is unfounded and you find yourself steaming. When you ve cooled off, contact the customer and keep your response simple. Consider just thanking the customer for the feedback and choosing your dealership. Trying to defend your dealership s actions may only fuel the person s anger people who post online are typically vocal and may well strike back. If a customer posts a negative review and it turns out to be true, fess up. Have the employee who met with the customer respond directly, admit the mistake and right the wrong. Keep in mind that most sites give you the choice of ing the customer directly or posting your response for all to see. To decide, ask yourself if it s beneficial to your dealership for potential customers to see how you responded to the situation. A IS FOR EFFORT Whatever way you choose to combat negative reviews, you probably won t be able to reverse the negative remarks of every customer. But use the tools available to give it your best shot. SIDEBAR: Outside Help Some dealerships turn to a professional service to help them manage their online reputation. Here are a offers tracking services and will capture positive responses from customers at key points in the retention cycle and get them online. extéresauto helps clients track and negate bad reviews by quickly ing the unhappy customer and trying to rectify the matter. Presto Reviews helps customers build their own review sites and post both positive and negative reviews readers get to see how your dealership works to turn things around. If you do use a professional service, be sure to find out exactly what it will do for you. And, because your reputation can be damaged in a New York minute, be sure to find out how quickly you ll have a chance to turn a bad review around.

4 DEALERSHIP INSIDER / June 13 SHOULD YOU EXPAND YOUR STORE S HOURS? Marty saw an opportunity: Three of his competitors had closed their doors, and he knew their customers would be shopping for a new place to get their vehicles serviced. Marty took action: he hired several more service technicians and changed his hours of operation. Marty expanded service hours from 8 a.m. to 5 p.m. Monday through Friday to 6 a.m. to 8 p.m. on those days. As part of his business plan, Marty also allocated more money from his budget (about $7,000 a month) to radio and, for the first time, TV advertising. So how did Marty do? In short, his service business took off with a vengeance. Many of the new customers as well as some of his existing customers seized the chance to bring in their vehicles before and after work. After one year, Marty s service department revenue jumped from $100,000 a month to nearly $145,000. CUSTOMERS CRAVE CONVENIENCE If your dealership hasn t expanded into evening hours, consider the concept. You may be missing out on a profitable opportunity and not setting yourself above your competition. And if you don t already offer weekend hours, look into that, too, simply to keep up with your rivals. The biggest rise in expanded service hours came during the recession, says Paul Taylor, chief economist for the National Automobile Dealers Association (NADA). Dealers needed to rely more heavily on service and parts sales for revenue than new car sales. The climb has been fairly steady since, according to NADA statistics. As of year end 2011, 74% of dealerships offered their customers the chance to get their cars serviced during the weekend, according to NADA DATA And 28% offered both weekend and evening hours. Only 22% of dealers stuck to a daytime, Monday through Friday schedule. COSTS MUST BE JUSTIFIED Although expanded service hours fill customers need for convenience, dealership owners shouldn t automatically think that additional service hours equate to additional revenue. You could be open 24/7 but that s likely to be prohibitively expensive, said Taylor. There probably would be hours when your service bays would be empty. Your costs wouldn t be justified. Do your homework before jumping on the expanded-service-hours bandwagon. A good place to start is asking your customers whether they would service their vehicles outside your current hours. Are the positive responses high enough to justify your additional costs: utilities, salaries and wages, including possibly higher compensation for those working extended hours? Your CPA also can be of assistance. He or she can analyze the financial side of the equation to determine the volume of sales needed to cover the extra costs incurred, including the number of additional employees needed to cover the increased hours. Or you might want assistance in developing a plan to restructure current staffing levels to allow for the expanded operating hours. BEING MORE COMPETITIVE Expanding service department hours might be a profitable move for your business. With more older vehicles on the road than ever before and used car sales steady, expanded service hours may be one smart way to expand your business without adding floor space, or buying or building another store. Additionally, expanded service hours may be necessary to compete with quick-lube stores and independent garages, which typically are open in the evening. CONSIDER PLUMPING UP YOUR SERVICE MENU Searching for revenue to keep the bottom line healthy, a number of dealerships have added F&I products to their service offerings. A possible influx of longer-term customers at your store can make it worthwhile to consider selling service contracts and related products in the service lane. TIMING IS EVERYTHING Dealerships are finding that it s easier to sell F&I products at the time of a costly repair, or when the customers warranties are about to expire, than it is at the sales closings. As a result, more service writers are being trained to talk about the value of service contracts and prepaid maintenance plans and how to close them. Consider this: If your service area sells three service contracts per week for the next year, that would be more than 150 additional customers a year who would be tied to your dealership for the next, say, four years. And keep in mind that the first 180 days after new- or used-car delivery is generally considered the most critical time for a service area to establish a relationship with customers. SALES TECHNIQUES THAT WORK Take Charlie Customer and his recent-model SUV. The service writer, armed with Charlie s customer information, asks him if he knows that his warranty will expire in a month. Charlie becomes more interested in purchasing a service contract than he was when he first bought his new vehicle. Or using a different technique, the service writer asks Charlie to figure out when his 24-month warranty will end. Getting customers to realize on

5 their own what they ll be paying for service can be a powerful tool. This is also a good time to point out that many auto parts aren t repairable today, and then provide some pricing examples for replacement parts. The customer will likely see the wisdom of a service contract. Or consider Helen, who wasn t interested in a prepaid maintenance plan when she bought her three-year-old SUV from you. But she s changed her mind now that she s paying for her first front brakes replacement. Prepaid maintenance plans and service contracts are among the best-selling F&I products, along with tire and wheel protection, guaranteed asset protection, insurance, and security products, according to AutoNation, one of the country s largest dealership groups. READINESS IS KEY The service writer can use the dealership s customer relationship management (CRM) software to find out when customers warranties are up and to send an notice before the customer s next visit. Make sure that your service area has up-to-date brochures on the F&I products you re promoting when the customer comes in for his or her appointment. A few years ago, when selling these products in the service lane was new, the service writer would get the customer interested in the product and then walk him or her to the F&I department, where an F&I person would close the sale. But these days well-trained service writers usually handle the promotion and sale in the service area, either in the customers waiting room or by the service writer s station. This quickens the process for the time-conscious customer and, because the sale will be recorded to the service area, heightens service manager motivation. The service manager should coordinate training, typically by the store s F&I manager, a contract provider or another vendor. The service manager also should set sales goals and evaluate individual performance. GET PROFESSIONAL PROJECTIONS Adding F&I products to your service lane can boost your dealership s profits. Your CPA can crunch the numbers to determine if it s likely to be a profitable endeavor for your store. HHM SPECIAL: Records Retention Schedule For Businesses Retaining business records is an important practice for many reasons, including in case of an IRS audit or other examination. Storage space restrictions make it important for businesses to establish a retention schedule that takes into account state and federal regulations, as well as specific industry standards. The retention periods listed below are intended as a general guideline only. This is not a legal document. Please contact HHM if you have specific questions about destroying tax or accounting records. DOCUMENT Accidental reports/claims (Settled Cases) Accounts payable ledgers & schedules Accounts receivable ledgers & schedules Audit reports Bank statements Capital stock & bond records Cash books Chart of Accounts Checks (Cancelled checks for important payments, special contracts, purchase of assets, payment of taxes, etc. Checks should be filed with the papers pertaining to the underlying transaction.) Checks (canceled except for those above) Contracts & leases Correspondence, general Correspondence, (legal & tax related) Customer files Deeds, mortgages & bills of sale Deposit slips Depreciation schedules Employee personnel records (after term.) Employee applications Expense reports Extended warranty agreements Financial statements (year-end) RETENTION PERIOD DOCUMENT General ledgers, year-end trial balance Insurance policies (expired) Insurance records, accident reports, claims, policies, etc. Internal audit reports (misc.) Inventory records Invoices to customers or from vendors IRA/Keogh plan contributions, rollovers, transfers, & distributions Minute books of directors, stockholders, bylaws, & charter OSHA records Payroll records, summaries, & tax returns Petty cash vouchers Purchase orders Receiving sheets Retirement plan records Safety records Sales records Service contracts Subsidiary ledgers Tax returns, revenue agents reports, other documents relating to determination of income tax liability Time cards & daily reports Trademark registration, patents, copyrights Trial balances (monthly) Vehicle jackets W-2 forms RETENTION PERIOD 6 years

6 HHM S AUTO GROUP WHY CHOOSE HHM S AUTO GROUP? We know that what sets apart a successful dealership from all of its competitors is its commitment to service excellence. The HHM Auto Group seeks to provide the same level of service excellence to your dealership that you provide to your customers. We pride ourselves on providing the following traditional and non-traditional services to our clients: RESPONSIVENESS PROACTIVE ADVICE COMMUNICATION ACCESSIBILITY Our professionals have expertise in numerous areas, allowing us to respond promptly to your concerns. We are on the leading edge of issues affecting dealers across the nation, and we strive to learn all we can about each dealership we service. This enables us to provide proactive advice unique to your business. We want to meet with you regularly in order to devise the best ideas, strategies, and plans for achieving your goals and objectives. Our service teams are constructed to foster consistent and effective communication. We have low staff-topartner ratios, and our partners are personally involved in each engagement to give you experienced guidance and reliable service. HHM AUTO GROUP SERVICES Traditional Accounting Services Audit & Attest Services Tax Planning/Preparation Estate/Succession Planning LIFO Services Internal Control Reviews Business Valuations Cost Segregation Studies 401(k) Plan Services/Investments Litigation Support Educational Seminars Non-Traditional Accounting Services Operational Reviews Expense Analysis & Control Floorplan Analysis Buy/Sell Structure & Negotiation Accounting Staff Training DMS Optimization Business Performance Analysis & Forecasting Financing Alternatives & Capital Analysis Reinsurance Company Alternatives Buy-Here/Pay-Here Consulting Related Finance Company Structuring Interim Controller/Office Manager Support CALL THE DEALERSHIP SPECIALISTS AT HENDERSON HUTCHERSON & MCCULLOUGH, PLLC RANDALL HEBERT, MBA, CPA, CVA RHEBERT@HHMCPAS.COM TRAVIS M. HORTON, MBA, CPA THORTON@HHMCPAS.COM 1200 MARKET STREET CHATTANOOGA, TN HHMAUTOGROUP.COM