Top Metrics to Watch
Understanding basic financials is a common challenge faced by newly hired managers, whether you promote from within the dealership or bring in a new person from the outside. How do you prioritize the immediate training they will need to succeed in their new position?
Naturally, priority is given to training specific to their department’s primary job skill sets. The lesser but still important duties are the associated skills they’ll need when all elements of a plan are considered.
Primary responsibilities
Two of the primary responsibilities of managers are to create and manage budgets. Outside of our accounting departments, accounting or financial training is rare for the people we normally have running a dealer’s sales, parts or service departments. In addition to the department-related skills that earned them the position in management, new managers will require financial management skills. Unfortunately, our industry has relied mainly on the “learning through osmosis” method to convey that knowledge.
It’s the only way to explain what we encounter when we survey middle managers about their level of financial understanding at any of the dealer training courses offered by the association’s Dealer Institute. Typically, the level of understanding on a scale of zero to 5, with five being the best, averages between a 1 and 2. This is not their fault.
WEDA’s Dealer Institute offers great introductory financial training as part of its Dealer Management training program. In the meantime, a rudimentary internal training session could pay big dividends.
Internal Training Steps
Step 1
Step one is explaining the Income Statement. We can use something as simple as a lemonade stand to illustrate. Emphasize that an Income Statement covers a defined period of time, whether a day, a week, a month or a year. Go over the structure of it, as follows, including numbers:
For the Period Ending 12/31/18
| $ | Sales | Lemonade Sales | $15 |
| -$ | Cost of Goods Sold | Lemons, sugar and cup costs | $ 8 |
| =$ | Gross Margin | Gross Margin | $ 7 |
| -$ | Operating Expenses | Advertising signs and stand repair | $ 4 |
| =$ | Operating Income | Operating Income | $ 3 |
| +/- | Adds and Deducts | Tips | $ 2 |
| +$ | Net Income | Net Income | $ 5 |
There you have the fundamentals of an Income Statement, which is simple to grasp and translate into a dealership application.
Step 2
Step two is explaining the Balance Sheet. An easy example is to create a balance sheet for someone’s half-ton truck. Balance Sheets are for a specific date in time.
Assets – items of value used by a business:
-
-
- Current assets – cash or should become cash within one year:
cash, accounts receivables and inventories
- Current assets – cash or should become cash within one year:
-
- Fixed or long-term assets – kept for more than one year:
land and buildings
furniture, computers, tools, vehicles
Liabilities – what is owed on the assets:
- Current liabilities – due within one year:
accounts payable
customer deposits
accrued taxes and expenses
equipment floorplan and short-term notes
the portion of long-term loans due within one year - Long-term liabilities – due in more than one year
long-term loan payments due beyond more than one year
Owners’ Equity (or net worth) – investment by owners:
inventory (initial investment)
retained earnings (earnings left in the business)
Half-ton example
Pete has a half-ton truck he bought two years ago for $40,000. Today, it’s worth $30,000 and he still owes $18,000 against it ($6,000/year for three years).
As of 12/31/18
| Assets | ||
| Current assets | $ 0 | |
| Long-term assets – Half-ton truck | $30,000 | |
| Total Assets | $30,000 | |
| Liabilities | ||
| Current liabilities – current year payment | $ 6,000 | |
| Long-term liabilities – payments for years 2 and 3 | $12,000 | |
| Total Liabilities | $18,000 | |
| Owner’s Equity | Paid for equity in half-ton truck | $12,000 |
And there you have it – financials 101 for your new managers in an hour or less.
Top Metrics to Watch is an ongoing feature brought to you by the association’s Dealer Institute to help dealers better understand key performance indicators and industry metrics to effectively manage their businesses.
GORD THOMPSON is a former dealer and current trainer and consultant for the Western Equipment Dealers Association’s Dealer Institute. Thompson specializes in financial training. Please send questions and/or comments to gordthompson@sasktel.net.
