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Pumping up profitability

December 15, 2014

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Dealership owners know that, in order to be successful, they need to make sales. So most dealerships devote significant resources to advertising and marketing efforts designed to pull potential customers in the door, and to compensating good salespeople who can “seal the deal.”

But while selling vehicles is obviously important, it might not be the most critical aspect of dealership success. Dealerships can sell truckloads of vehicles and still run into problems if owners lose sight of the bottom line — the overall profitability of the sales they’re making.

Moves you can make
There are a number of things dealerships can do to lift profitability. Consider these profit-boosting moves:

Improve inventory management. The faster your inventory turns, the higher your profits will generally be, and the better your cash flow. But there’s both an art and a science to finding the right balance of vehicle inventory for your dealership. Carry too many vehicles and you’ll pay excess carrying costs that cut into your profit — carry too little and you might be unable to meet customer demand.

Carefully track inventory turnover and decide what to do with vehicles still on your lot after a certain length of time: lease them, wholesale them, or keep discounting them until they eventually sell.

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A cost segregation study can be lucrative
If you have plans to remodel your dealership, or to build or purchase new facilities, you could save a considerable amount of money in taxes by having a cost segregation study performed. These tax savings could then drop straight to your bottom line, building up your profitability.

Cost segregation separates the individual assets of a facility into different categories for depreciation purposes: equipment, fixtures, income property, land improvements and buildings. Nonresidential income property must be depreciated on a straight-line basis over 39 years, but the other categories have shorter depreciable lives and can use accelerated depreciation methods.

Unless a cost segregation study is performed, the entire depreciable basis of the property will be categorized as income property. A cost segregation study will provide a detailed analysis of the costs related to a facility’s acquisition or construction, reallocating some of the costs as tangible personal property or land improvements. Plumbing and electrical, carpeting, parking lot paving, awnings and canopies are examples of costs that can often be reclassified as tangible personal property.

The faster depreciation write-offs that are achieved by conducting a cost segregation study may result in larger tax deductions sooner, which can increase dealership profits. Consult your tax advisor if you’re interested in initiating a study.
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Revisit your sales compensation plan. Many buyers today are more informed about vehicles when they walk in your door. They often already know which vehicle and features they want and how much they’re willing to pay. In this scenario, a fully commissioned salesperson might not be needed. You might be able to reduce your sales compensation, which will increase your bottom line profitability.

Choose your dealership management software program carefullyIn the past, only a few DMS providers captured the automotive market. But with the advancements in software development, a significant number of new players have entered the playing field, allowing for greater competition and reduced pricing. A less expensive DMS provider may be able to meet your needs and save your dealership significant dollars.

Capture your buyers’ service business. For most dealerships, the majority of their overall profit is derived from servicing the vehicles they sell, not from the vehicle sales themselves. So consider offering customers some kind of service discount, or even a free first oil change, to introduce them to your service department. Hopefully, they’ll return for future service.

Build and maintain lifetime relationships with your customers. View each sale not just as a one-time transaction, but as the beginning of a lifetime relationship with the customer. Most buyers will eventually shop for another vehicle, and the second (and third, and fourth) sale to a customer is usually easier and more profitable than the first one.

Join an automotive dealership “20 Group. These groups consist of similar but noncompeting dealerships that share best practices and strategies among themselves to help improve dealership management and boost profitability.
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You also can view standard financial ratios (including gross and net profit margins) among dealerships similar to yours so you can benchmark your numbers against them.

Sell the right F&I products. Finance and insurance (F&I) is a potential source of added profit for dealerships that sell vehicle financing, extended warranties, service contracts, gap insurance coverage, and after-market items such as floor mats and window engraving. You should approach F&I sales from a strategic standpoint by identifying both the highest margin F&I products and the ones that will provide the most benefit for your customers.

Eye on the prize
Vehicle sales are great, but it’s how much money is left over after all your expenses — that is, your profit — that will ultimately dictate your dealership’s success or failure. So keep your eye on the real prize, and consider how you can implement some of these profit-boosting tips to augment your bottom line.

© 2014

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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