Top Metrics to Watch
We know that the daily operation of the dealership requires a steady flow of cash. Demands from suppliers, financial institutions, utilities, and payroll never stop.
All departments must be aware of these cash demands and the impact their decisions have. Simply put, “cash is king.”
What is contribution margin?
Literally, contribution means what are you contributing… or “bringing to the party.” In a dealership, it refers to the Gross Margin dollars each department is contributing to cover the fixed expenses of the dealership. Some organizations include all expenses including interest, while others only consider fixed expenses. This is important to know if you are comparing your dealership metrics with other peer dealers or industry benchmarks.
What is absorption ratio?
This metric refers to the percentage each department’s Gross Margin dollars is able to cover of the overall dealership expenses.
Example. If your annual expenses are $3 million and each of the three departments – sales, parts and service – are contributing $1 million in Gross Margin dollars, that would be 33.3% each.
Aftermarket Absorption is the level that the parts and service departments are covering the dealership’s total expenses. Ideally, the goal is to have parts cover 50% and service to cover 50% for a 100% Aftermarket Absorption.
Why is it important?
In most agricultural dealerships that sell both small and large ag equipment, trades are accepted in lieu of cash. In some cases, it can take 12-24 months to fully wash out of these trades. The sales department may show a “paper profit” on the sale of a new unit; however, there is often a negative cash flow situation as they deal with the trades. The cash difference paid by the customer goes to the manufacturer, the trade goes on interest-bearing floorplan.
Costs such as freight, predelivery, trade reconditioning, sales commissions and floorplan interest are cash demands born by the dealership. In large equipment deals, such as combines, tractors or sprayers, there may be two to four trades in the washout cycle. If trades start to back up, units may have to be discounted or sent to auction at no profit in order to turn them into cash.
Additionally, sales managers may have to walk away from large deals because the cash demands on taking additional trades are too risky.
Parts and Service Departments need to be your cash generators. Customer labor sales should account for >60% of your total labor sales and with a 1:1 parts to labor ratio, parts and service work can inject cash on a consistent daily, weekly and monthly basis. Service gross margins in the >60% range and parts gross margins in the >30% range provide the cash to pay the bills.
Bulletproofing your dealership.
Achieving 100% Aftermarket Absorption must be a long-term target. This will take a total dealership approach to ensure everyone understands the importance of driving aftermarket sales and controlling overall expenses. This will reduce the stress of monthly cash flow demands, allow the organization to weather periods of slow whole-goods sales, and, most importantly, take deals that drive market share and increase machine population.
Information from the 2020 WEDA Cost of Doing Business Study indicates larger multistore dealer groups have obviously made this an important part of their focus.
Although these CODB numbers are an indication of North American dealer averages, we are seeing high-performance dealerships reporting Aftermarket Absorption in the 82-92% range, which proves 100% is possible.
Absorption
|
2020 |
-$25 million |
$25-$75 million |
+$75 million |
|
Parts Absorption |
27.3% |
31.9% |
37.9% |
|
Service Absorption |
26.5% |
27.0% |
29.0% |
|
Total Absorption |
53.8% |
58.9% |
66.9% |
Source: WEDA 2020 Cost of Doing Business Study (CODB)
Areas of focus
Parts and Service Departments need to ensure they are working together. In our Dealer Institute training programs, we stress the importance of breaking down the silos between departments.
Parts staff needs to drive service sales by promoting inspections and the value of extended parts warranty for dealer-installed parts. Service staff needs to be promoting incremental parts sales on every customer work order. Driving customer labor sales must be a primary goal for all departments.
Reducing WIP, shortening work order billing cycle times and controlling aftermarket accounts receivables all impact cash flow. Large work orders that are not closed on a timely basis can have a negative cash flow effect, as parts, sublet and technician wages need to be paid.
On a positive note, many of the dealers we work with are improving in this area. It won’t happen overnight. We encourage dealers to set both short- and long-term targets, educate everyone on why it’s important, and show them how even the smallest decisions can have a negative or positive impact.
Please check out www.dealerinstitute.org for upcoming programs. The DI also creates specific customized on-site or virtual training programs for multistore groups.
Article Written By Kelly Mathison
Kelly Mathison is a former dealer and current trainer and management consultant for the Western Equipment Dealers Association’s Dealer Institute. Mathison specializes in parts, service and aftermarket training. Please send questions and/or comments to kelly@kayzen.ca.
