Auto Dealer Monthly Magazine is the daily operations publication serving the retail automotive industry. This automotive publication serves dealer principals, officers and general managers with the latest best practices.
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over the curb / parting thoughts The Growing Funny Money Problem An 18-year former dealer principal with focus on special finance since 1989, Greg Goebel is CEO of Auto Dealer Monthly LLC, the parent company of Greg Goebel Training and Consulting. He is a leading industry consultant, trainer, author and speaker serving retail automotive dealers. Contact Greg at 941-685-9629. Greg@AutoDealerMonthly.com A problem has been growing over the past decade, especially with franchise dealers, as to what comprises gross profit. For decades, gross profit was calculated as the difference in the total revenue received from a customer less the cost of the inventory (what you paid for it) and any additional equipment or reconditioning (cost of sales) that was added to the unit before it was sold. The most franchise dealers had to contend with was their holdback, which was almost always handled by reducing the inventory cost and setting it up as a receivable. Then came rebates. Not a big problem. They were just another piece of the revenue equation and weren't a big deal as long as you did eventually receive them. Ditto for dealer incentives, as long as you could tie them specifically to the sale of a specific unit. An additional source of revenue in many states has been the document or processing fee. They range from a legal maximum in some states of approximately $50 all the way up to more than $1,000 per car in states like . Most dealers are taking the document fees straight to "other income" to avoid paying sales representatives and even managers on that income. Of course, in many cases it causes the vehicle gross to be artificially lowered, especially in cases where an auto finance company limits an advance based on MSRP, invoice or book value. For the last several years, there are other monies being thrown into the revenue stream by the factory – some with strings and some without. General Motors, for example, has their Standards for Excellence program and their Essential Brand Elements program, designed to help dealers meet (relatively) new facilities requirements. There are massive amounts of money being provided to dealers meeting certain sales, CSI and facilities goals, often totaling $1,000 per vehicle. This is not unique to GM, and it explains why – with skinny margins between MSRP and invoice pricing and more "funny money" available behind the scenes – it is common to see the gross profit on vehicle sales amount to nothing or even less than nothing on the financial statement. Then you factor in the hard packs. These aren't the packs dealers have used for decades to artificially reduce the commissionable gross profit on the deal, but they are an amount of money – often very significant – added to the inventory value of the vehicle and then either used to reduce a line-item expense or moved directly to the bottom line via that wonderful "other income" account. Finally, the complications to gross profits are not limited to new vehicles. Both franchise and independent dealers often hardpack used vehicles over $1,000. Sometimes all or part of this money is used to offset wholesale losses, but more often a significant amount of it and all the documentary or processing fee heads straight south to the "other income" line item again. Again, much or all of the reason for this is to shelter some of the dealership's revenue from employee compensation. While I have no problem with this in principle, it does lead to difficulties arising on the monthly financial statements. I recently saw a Mercedes-Benz dealer's financial statement, and the dealer is barely breaking even on his operating profit; however, when you add everything in from other income, he is netting $2 million to $3 million a year. The reason for this is the vehicle gross profits are artificially too small, either per unit sold or for the department, and there is no way they can offset their expenses to show the profit above the other income. I do have a problem with that, especially when it comes to forecasting, budgeting and employee morale. (I strongly believe that happy employees create happy customers.) First, the artificially-low gross profits, when compared to operating expense percentages (especially variable) like compensation and advertising, cause those that would otherwise look favorable using "all-in" numbers to look horrible. If you aren't comparing apples to apples, you are doing yourself a significant disservice by creating unrealistic goals. Care and prudence must be exercised when forecasting and budgeting or else you risk employee dissention and even your own frustration when these goals aren't achieved. I recently had a good friend who is a general manager for another longtime friend call me and tell me he is getting ready to make a change. It is a shame, as the general manager is knocking the cover off the ball, netting $130,000 per month to the bottom line with another $135,000 per month going to the real bottom line. The dealer (to shelter compensation) is both raising the hard pack and, at the same time, saying they need to trim expenses to keep the percentages in line. This store was hemorrhaging money before this general manager took over. Now, they have killed the golden goose, all for the sake of greed. As you look forward to 2013, and as you play with "funny money," packs and fees as you always will, remember – at least when comparing your expenses to whatever standard you choose (NCM Benchmarks, NADA Guides, my special finance targets or just industry averages )– you need to be sure you are comparing apples to apples and using the "all-in" or "super gross." The business is always changing, but one thing that remains the same is good people are the key. Don't cut your nose off to spite your face by not being reasonable with your expectations. May you have a happy, healthy and prosperous New Year! Until the next time, 35