Top Metrics to Watch
Over the past six months, more than 500 parts people have attended the Dealer Institute’s Parts Counter Sales Training Program. Attendees have ranged from people who had only been on the job a few weeks to seasoned veterans with over 30 years’ experience.
When we developed the program, we decided to include education on understanding the basic business metrics, such as gross margins, expenses, net income, inventory controls, and the impact aftermarket has on dealership profitability and cash flow.
During the one-day program, we spend the first two hours helping attendees understand the basic financials of a typical agricultural dealership. The first reaction is usually, “That doesn’t apply to me” or “I have no impact on the financial outcome… why do I need to know this stuff?”
Many dealers have seen the benefits of sharing their dealership financials with their management team. But why stop there? Perhaps all employees need to see the big picture. As one dealer told me, “If you don’t share the numbers, they will guess and generally they will be wrong.”
One of the first questions we ask is, “What do you think the owners take as a net profit on every dollar’s worth of parts sold?” We get answers ranging from 10 to 50 cents. We then ask, “What do you think the owners take as a net profit on every dollar’s worth of total dealership sales?” Again, answers range from 5 to 50 cents.
Using the data from WEDA’s Cost of Doing Business study, we can show them a more realistic picture of a typical dealership’s profitability. We help students understand these critical metrics and how the small decisions they make every day can have an effect.
Business financial success boils down to two critical things – profitability and cash flow. Without success in these areas, the business will not survive long term.
Parts gross margin dollars are calculated by subtracting the direct cost of the part from the sale price. Most dealers include parts discounts earned and special freight into their cost of sales. When a parts counter person doesn’t fully use stock order opportunities or forgets to collect special freight, it affects gross margins as well as net income.
Discounting can have a huge effect. The chart The Effect of Discounting shows that if you are currently making a 30% gross margin on a part, and you decide to discount by 10%, you need to sell 50% more of those parts to generate the same gross margin dollars.
Discounting and special pricing can be an effective part of your marketing plan. People need to understand the difference between “proactive” or good discounting and “reactive” or bad discounting. Sometimes these decisions are made at the parts counters.
Students also learn to understand gross margin dollars and gross margin percent. Gross margin dollars provide the cash required to help pay the expenses of the dealership. The Parts Margins chart from the Cost of Doing Business study shows that North American dealerships’ parts gross margin percent has been on an upward trend over the past few years. However, actual gross margin dollars dropped dramatically in 2018.
You pay the bills with dollars not percentages. Therefore, your staff needs to look for ways to increase margin dollars.
Using these metrics, it drives home the point that parts and service sales generate much of the cash required to keep the dealership afloat. This helps them understand aftermarket contribution margins and absorption.
Another eye opener is the actual net profit as a percent of total sales that the average dealer makes.
Most front-line people hear salespeople talking about selling a $500,000 machine and assume the dealership made a huge profit. In larger organizations, they may hear about the millions of sales revenues the company is generating. What they don’t hear (or see) is the actual net bottom line. Once they see the overall expenses, they are usually surprised to see what is left as a percent of those revenues as shown in the chart of Total Profit from Operations.
To help attendees understand the effect of the decisions they make, we use some examples of typical “controllable” expenses they can relate to.
The Cost of Doing Business study in 2015, for example, showed the average total dealership net income, as a percent of total sales, averaged 2.3%. We ask them to calculate the following:
At 2.3%, how many dollars’ worth of product (parts, service and wholegoods) does the dealership need to sell to recover?
- $5/month in missing parts (5 x 12 = $60) $ 2,608.69
- $100 write off or unrecovered freight $ 4,347.82
- $250 work order write off $10,869.56
To calculate: Take the controllable expense divided by the dealership’s net income percent. Example: 250 / 2.3% = $10,869.56.
At 1.1%, the figure from the 2018 Cost of Doing Business study, how many dollars’ worth of product (parts, service and wholegoods) does the dealership need to sell to recover?
- $5/month in missing parts (5 x 12 = $60) $ 5,454.54
- $100 write off or unrecovered freight $ 9,090.90
- $250 work order write off $22,727.27
To calculate: Take the controllable expense divided by the dealership net income percent. Example: 250 / 1.1% = $22,727.27.
This gives every employee a direct line of sight from a decision they make on a “controllable” expense to its effect on the business.
To drive the point home, we show them the industry trends of Total Expenses as a percent of total sales revenue in an average North American dealership.
Once they know WHY, they can focus on HOW
In the second half of our program, we ask them to think of ways they can increase performance at their dealerships. This is when the magic often comes out. We do exercises on increasing sales, improving margins, controlling expenses, watching turnover, and other inventory controls.
Without seeing the numbers, it’s like playing a game without a scoreboard. No one really cares. Once they see the numbers, their competitive instincts kick in and they want to improve their score. As one dealer put it, “Once they understand the impact of their decisions, they automatically make better decisions.”
Finally, we ask each participant to write down one to three items they plan on implementing once they return to their dealerships. Often, they go home and ask how their numbers compare with the industry averages. Dealers have reported back to us that their managers have an easier time implementing processes because their staff now realize why certain things are important.
The feedback we’ve received has been positive. At first, some dealers questioned the value in sharing their financials with every employee. However, after the program, they tell us their employees are more engaged and often excited to contribute to the success of their dealerships.
Here are some of the comments we’ve received about the Dealer Institute’s Parts Counter Sales Training Program:
“This program gave me more confidence in the decisions I make and the importance of implementing changes in our dealership.”
“Understanding the basic numbers has helped my staff understand how their decisions have an impact.”
“We have always shared our financials with our managers. However, we are now seeing the value in having all our staff know and understand the numbers.”
“It helped me better understand the things I need to do everyday to improve myself and my company.”
As a result of this feedback, we plan to launch a similar program this fall to help educate front-line service people.
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 firstname.lastname@example.org