Given the cumbersome nature of expense categories in the automobile industry, dealerships must continuously work to maintain internal control in order to efficiently manage these expenses. Here, the experienced accounting professionals at bgr CPAs discuss the process and benefits of managing expenses in an automobile dealership.
As profit margins tighten, project volumes decline and earning goals elude, it becomes necessary to assess and improve upon another critical aspect of an automobile dealership’s bottom line – Expense Management.
Dealerships are challenged with having many expenses categories. Some businesses only have 65 different indirect expenses categories, whereas most dealerships typically have over 130. In order to manage the various volumes of data and maintain control of spending, it is important to implement a strategized approach.
Critical First Steps
The first step is to get a clear picture of the current spending model. Most dealerships utilize a Data Management System (DMS) such as ADP or Reynolds and Reynolds. These systems can be useful tools for data extraction, as most can convert information into an excel format. In order to understand which vendors are paid under which categories, we recommend that the dealership extracts disbursement information from their DMS. This can be done monthly, quarterly or, even, annually. From this extraction, management can sort the vendor name by expense category; thus, generating a spreadsheet report of the dealership’s vendors and their correlating expense categories.
Taking one expense category at a time, the dealership can create a spending plan that includes assessing the quality of the vendors in each expense category and monitoring the risk of various contracts. Management can also determine if there are expense categories that are not providing a key function for the dealership that can be trimmed substantially.
It is possible to find, for some expense categories, that multiple vendors are necessary. In such instances, the quality of the vendors should be determined based on a number of factors, including:
Needs of the dealership:
- Does the vendor keep convenient hours for purchases?
- Does the vendor provide adequate support for all locations?
- Does the vendor offer high quality products?
Long-term business relationship with the dealership:
- Is the current relationship profitable?
- Is the vendor’s reputation in good standing?
Sensible business partnership with the dealership:
- Is the vendor pricing competitive?
- Are fuel surcharges known and limited?
- Is the vendor willing to commit to a firm price for 12 – 24 months out?
- Are minimum order charges clearly stated?
In each expense category, the dealership should choose a limited number – perhaps 2-3 per category – and let the chosen vendors know that they are on the “approved vendor” list.
Negotiate – Negotiate – Negotiate
Pricing and terms can often be negotiated. Once you reduce your spending to a limited number of vendors, you will, potentially, have more bargaining power to negotiate favorable pricing or risk inherent in the contracts. Constantly push your vendors to provide more favorable terms.
Finally, a dealership should institute internal controls around spending. Purchasing should be standardized and controlled based off an approved vendor list, and monitored regularly.
Managing spending is an investment. It takes time, energy and diligence; however, the benefits include a reduction of risk, increase of cash flow and efficiency in the dealership.
Our professionals have helped clients within the auto dealership industry throughout the Mid-Atlantic region. For assistance or for more information please contact the experienced professionals at bgr CPAs today.