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Ways to Lower Your Dealership’s Cost Structure

The COVID-19 pandemic turned the dealership world upside down last spring, and the ramifications are still being felt. With over a year's experience behind us, it's a good time to discuss a pivotal lesson learned during this precarious time.
Lowering costs should always be a key goal for dealerships but, during the pandemic, it's taken on greater urgency. Here are three areas to examine.

Staff.

Payroll is one of the largest expenses for most dealerships so it's one of the first places to look when cutting costs. Perform a top-to-bottom analysis of your dealership's staffing expenses to get a handle on how much money you're spending. Then start looking for areas you can trim.

This doesn't necessarily mean you have to lay off employees. Some dealerships have shaved fringe benefits — for example, by suspending matching contributions to employees' retirement accounts or requiring that employees contribute more to their health insurance. Or perhaps you can reduce work hours across the board for most or all employees instead of laying anyone off. These may not be popular solutions, but drastic times call for drastic measures.

Some dealerships may also be able to obtain additional funding through the 2nd round of the Paycheck Protection Program loan draws to assist with cash flow to cover these costs and other operating expenses as well. There are also some further opportunities to consider like taking advantage of employee retention tax credits (ERTCs). Be sure to check with one of our advisors about these cost-saving options.

Advertising.

Many dealerships rely heavily on traditional advertising like newspapers, television, and radio to drive store traffic. But these advertising channels are expensive, which has forced some dealerships to cut back on their ads during the pandemic.

If you haven't shopped your advertising account with other agencies in a while, now would be a good time to do so. Some ad agencies have lost revenue during the pandemic and they might be more willing to work with you on pricing than in the past. Also investigate nontraditional forms of advertising such as social media, online, and email marketing — these can be less expensive and more effective than traditional advertising in many circumstances.

Inventory.

Improving inventory management can reduce vehicle carrying costs and floor plan interest, two major expenses for most dealerships. Also, keep a close eye on some key metrics, including inventory and accounts payable (AP) turnover:

  • Inventory turnover ratio (in days): 365 / (Cost of Goods Sold / Average Inventory Value)—as a best practice, a 30-day supply of inventory is considered a good benchmark within the industry.
  • AP Turnover (in days): 365 / (Cost of Goods Sold / Average AP Balance)—dealerships should take advantage of vendor payment terms and any discounts offered by their vendors to help reduce expenses.

It's also important to manage your inventory of parts and accessories. In some cases, dealers may be able to return some items to the manufacturer for a refund.

Inventory management decisions should be based on data, not hunches or “gut feelings.” Your dealership management system should provide you with this kind of information. Examples include which makes and models are selling best, the prices for which they're selling (including the percentage of your manufacturer's suggested retail price), and how many days it takes to sell them.

Survive … and thrive

Your dealership can possibly “turn lemons into lemonade” by tapping into these and other lessons from the pandemic. Such cost-saving measures can help position your dealership well as a post-pandemic economy revs to life.

This article first appeared at Lane Gorman Trubitt, LLC., by Jeff Fisher, CPA, Senior II, Assurance Services.

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