In the ever-evolving landscape of independent dealerships, mastering expense control is paramount for sustained profitability and long-term success.
At the National Independent Automobile Dealers Association, a comprehensive framework is advocated, categorizing expenses into four distinct areas to facilitate a deeper understanding of and efficient management of each one.
In addition to direct expenses, which directly impact revenue generation, NIADA emphasizes the significance of managing personnel costs, operating expenses and fixed expenses within specified benchmarks.
Let’s explore these categories and their respective benchmarks in detail, shining a light on how adherence to these benchmarks can lead to a healthier bottom line and enhanced financial stability for dealerships.
Direct Expenses: Direct Expenses encompass costs directly attributable to revenue generation from vehicle sales and associated services and products. Whether it’s commissions or salaries and bonuses for the salespeople, advertising expenses, or interest on floor plan lines or credit lines used for purchasing vehicles, maintaining direct expenses between 22 and 25 percent of total operating gross ensures proportional expense management and safeguards profitability. An example of the effect the market can have on expense control, back at the height of the COVID phenomenon, many dealers were too slow to adjust sales compensation to counteract the runaway margins and because of this, they simply overpaid for salespeople.
Personnel Expenses: Personnel Costs comprise expenditures related to staffing and human resources. From salaries and benefits to clerical and BDC payrolls, managing personnel costs within the range of 22 to 25 percent of total operating gross is crucial for optimizing labor-related expenses while ensuring adequate staffing levels to meet operational demands. Employee headcount is generally the area of personnel expense control that needs the most attention. The dealers that “right size” their headcount for the current market conditions are putting themselves in a position to be successful as market headwinds begin to blow.
Operating Expenses: Operating expenses encompass various overhead costs necessary for dealership operations, including data processing subscriptions, legal and auditing fees, or travel and entertainment expenses. By limiting operating expenses to 12 to 15 percent of total operating gross, dealerships can exercise prudent expense management while allocating resources efficiently to support core business functions.
Fixed Expenses: Fixed expenses, characterized by their consistent and recurring nature, include expenditures such as rent, depreciation of equipment, depreciation of furniture and fixtures, as well as utilities. By operating within the benchmark range for fixed expenses, which is 10 to 12 percent of total operating gross, dealerships can mitigate the risk of budgetary overruns and ensure financial stability amidst fluctuating market conditions.
