By Ed Curry
NIADA 20 Group Senior Moderator
In the ever-evolving landscape of independent dealerships, mastering expense control is paramount for sustained profitability and long-term success.
At the National Independent Automobile Dealers Association, a comprehensive framework is advocated, categorizing expenses into four distinct areas to facilitate a deeper understanding of and efficient management of each one.
In addition to direct expenses, which directly impact revenue generation, NIADA emphasizes the significance of managing personnel costs, operating expenses and fixed expenses within specified benchmarks.
Let's explore these categories and their respective benchmarks in detail, shining a light on how adherence to these benchmarks can lead to a healthier bottom line and enhanced financial stability for dealerships.
Direct Expenses: Direct Expenses encompass costs directly attributable to revenue generation from vehicle sales and associated services and products. Whether it's commissions or salaries and bonuses for the salespeople, advertising expenses, or interest on floor plan lines or credit lines used for purchasing vehicles, maintaining direct expenses between 22 and 25 percent of total operating gross ensures proportional expense management and safeguards profitability. An example of the effect the market can have on expense control, back at the height of the COVID phenomenon, many dealers were too slow to adjust sales compensation to counteract the runaway margins and because of this, they simply overpaid for salespeople.
Personnel Expenses: Personnel Costs comprise expenditures related to staffing and human resources. From salaries and benefits to clerical and BDC payrolls, managing personnel costs within the range of 22 to 25 percent of total operating gross is crucial for optimizing labor-related expenses while ensuring adequate staffing levels to meet operational demands. Employee headcount is generally the area of personnel expense control that needs the most attention. The dealers that “right size” their headcount for the current market conditions are putting themselves in a position to be successful as market headwinds begin to blow.
Operating Expenses: Operating expenses encompass various overhead costs necessary for dealership operations, including data processing subscriptions, legal and auditing fees, or travel and entertainment expenses. By limiting operating expenses to 12 to 15 percent of total operating gross, dealerships can exercise prudent expense management while allocating resources efficiently to support core business functions.
Fixed Expenses: Fixed expenses, characterized by their consistent and recurring nature, include expenditures such as rent, depreciation of equipment, depreciation of furniture and fixtures, as well as utilities. By operating within the benchmark range for fixed expenses, which is 10 to 12 percent of total operating gross, dealerships can mitigate the risk of budgetary overruns and ensure financial stability amidst fluctuating market conditions.
Operating within these benchmark ranges for expenses allows dealerships to achieve a favorable net-to-operating gross ratio, ranging from 23 to 34 percent. In fact, at the 23 percent low end, a dealer will still generate a very good return. But at the 34 percent high end, a dealer will be generating world-class results. This underscores the importance of not only increasing sales revenue but also effectively managing expenses to maximize profitability.
Keep in mind that you may not be able to limit one of the categories to the benchmark numbers at all times. If you can operate below the lower limits of one or more of the other categories while running over in a category, you can still achieve the desired result. By embracing a holistic approach to expense control, dealerships can enhance their financial resilience, capitalize on growth opportunities and navigate challenges with confidence.
In the dynamic and competitive automotive retail industry, adept expense control is indispensable for independent dealerships seeking sustained success. By adhering to benchmark numbers for direct expenses, personnel costs, operating expenses and fixed expenses, dealerships can optimize expense management practices, enhance operational efficiency and bolster profitability.
Making money in the automotive retail business isn't solely about increasing sales or gross profit; it encompasses the ability to control expenses effectively. Through diligent expense management and strategic decision-making, dealerships can achieve financial stability and thrive in an ever-changing marketplace.
If you would like to explore how NIADA could help you with all this, consider joining a 20 Group. For information, visit NIADA.com/20-Groups.
