LGT's Profit Sense

Like all businesses, improving financial performance is a top priority for dealerships.  One way to maximize dealership performance is for owners to obtain CPA-prepared financial statements.  These financial statements can help identify financial and operational deficiencies and discover areas to cut costs and generate sales.  To reap these benefits, dealers must learn how to identify the information that will be most valuable to their business. 

Which Statements Should You Examine?

CPA-prepared financial statements include the balance sheet, income statement (also referred to as a profit and loss or P&L statement), and statement of cash flows.  The balance sheet lists a dealership’s assets, liabilities, and owner’s equity at a specific point in time.  Assets typically include cash, fixed assets, accounts and notes receivable, and inventory.  Liabilities typically include accounts payable, accrued liabilities, and debt.

The income statement reports a dealership’s sales, cost of sales, and expenses over a given period.  The difference between these amounts is your dealership’s profit (or, if negative, its loss).  Department performance is usually broken out on a dealership’s income statement: new vehicle sales, used vehicle sales, financial and insurance (F&I), parts, service and body shop.  This can help identify specific trends through each piece of your dealership.

The statement of cash flows reports a dealership’s cash inflows and outflows.  It shows changes over a period, instead of absolute dollar amount at a specific point in time.  It is important information because a dealership needs to have enough liquid cash on hand to meet operating expenses and purchase fixed assets.

Cash flow statements are usually divided into three parts that review cash flow from operating, investing and financing activities.  The net increase or decrease in cash for the period being measured is reflected at the bottom of the statement.

What Should You Look For?

Understanding how to analyze the above statements can help a dealer get the most out of their financial statements.  Consider the balance sheet: Improve cash flow by scrutinizing the balance sheet for trapped working capital. For example, if inventory in your parts department is growing but revenue related to parts is not, consider cutting back on parts purchases and putting the cash to better use elsewhere.

Another area to consider is the relationship between floor plan debt on new vehicle inventory and the cost of vehicles on your books.  Ideally, debt should be no more than 102% of the inventory balance.  If the debt-to-inventory ratio is above this guideline, it may be an indication of floored vehicles sold but not paid off to the lender.  

Dealers can also use information from the P&L to improve performance.  For example, the P&L statement will reveal F&I penetration, or the percentage of car buyers who also purchased a service contract or other F&I products.  F&I is an area that can heavily boost the profitability of a dealership and thus an important trend to monitor monthly.

Average repair tickets in your service department is another key performance indicator to understand.  Potential ways to boost this is to train service technicians on opportunities to upsell customers.  Rather than just completing an oil change, does the customer also need new wiper blades or filters?

Other financial ratios from information contained in the income statement include the following:

• Net profit to sales (as a whole or by department)
• Total dealership expenses to sales
• Net profit to gross profit
• F&I gross profit per vehicle sold

These ratios can be compared with industry benchmarks obtained from your Dealer 20 group, dealerships brought together across non-competing markets to compare benchmarks or address best practices, or can be used to compare to prior months for trending purposes.

The cash flow statement, meanwhile, provides dealerships with the inflows and outflows of cash so that they know if there are sufficient funds to run the store.  It also reveals the impact that managing the balance sheet has on the bottom line.

Share with Managers

It is important to share the insights you gain from your financial statements with the managers of your new and used car sales, parts, service, and F&I departments.  They are responsible for running these mini-businesses under your dealership roof and the more information they have, the better equipped they will be to generate positive financial results. 

CPA-prepared financial statements can be an important first step in maximizing your dealership’s performance.  The above financial trends and ratios are a few examples of the information obtained to make better, informed business decisions for your dealership or a specific department within your dealership.  In addition, sharing this information with managers can further help identify business decisions to maximize performance.

Need help making sense of your financial reports? Contact us today to set up a free consultation