Do you always seem to run out of money before all of your bills are paid each month?
Do you fluctuate buying cars from month to month based on cash flow on the day of the auction? Does payroll dictate what types of cars you buy each week?
You are not alone. Many facilities face these exact issues every week, if not every day. The question becomes: What can you do to help mitigate these issues?
These issues are symptoms of a larger issue: Cash Management. As cars become more expensive, customers become pickier (is that possible?), and competition from the internet forces us to turn a lower gross profit per car than ever before, we must become keenly aware of our cost of goods, gross sales, returns, fixed expenses, variable expenses, and profit in order to stay in the game.
But, what is the secret sauce? What is the secret mixture of cars that produces the highest net yield? These questions have different answers based on which facility is answering them. However, we all should be paying close attention to ratios that exist between certain elements of our Profit & Loss Statements.
By setting up our financial statements correctly, we can quickly look at ratios between two or three variables to evaluate the habits that are unique to our operations. Here are a few ideas that we have found to be beneficial for us:
Each General Ledger (GL) Income Account should have a corresponding Cost of Goods GL Account. Here are a few examples:
– In-Stock Sales should have a corresponding Cost of Goods for Car Purchases.
– Brokered Sales should have a corresponding Cost of Goods for Brokered Parts.
– New Parts Sales should have a corresponding Cost of Goods for New Parts.
Are you getting the idea? When you have the income accounts and Cost of Goods (COG) set up correctly, you can easily evaluate profitability by income segment. Are new parts making you money?
With the correct setup, you can quickly determine exactly how much Gross Profit that new parts sales are generating for your business. What is your average markup percentage for brokered parts? With the correct data, you can make a decision to expand, modify, shrink, or eliminate a revenue stream. Be sure that your Income Accounts have corresponding COG GL Accounts.
Track ratios of Variable Expenses compared to Income Accounts. Here are a few examples:
– Employee Payroll Expense versus Total Gross Income
– Fuel Expense versus Total Gross Income
– Freight Expense versus Freight Income
It’s the same idea here – if you are separating the expenses correctly, you can compare them to income accounts to determine the ratio that exists between the two. As you increase efficiencies, the ratios will decline. In the example of payroll, an inefficient facility may run at 25% of Gross Income and an efficient operation may dip into the 18% range. By tracking the numbers correctly over time, you can easily identify changes in efficiency levels that affect profits, positively and negatively.
Although the proper setup of your statements is crucial and it will help you identify areas of concern that influence profits, reducing expenses are the best solution to increasing profits. Each dollar of income costs your company about 40-50 cents to produce (assuming a 40% Cost of Goods and a 40% markup on brokered parts). Conversely, every dollar of reduced expenses increases your profits by one dollar. Spend a few hours per month looking over your expenses in detail. Look for expenses that have increased over the past year – have vendors added fees or service charges? Is it time to renegotiate a contract? Is it time to change to a hosted VOIP Phone System? Can you swap your Line of Credit to another bank and save $5,000 this year?
Proverbs 10:4 reminds us to work hard: “Being lazy will make you poor, but hard work will make you rich.” Stay focussed and diligently strive to put in a full day’s work, each and every day.