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January 21, 2008: Examining variable expenses should be vital to dealers this year

January 21, 2008
Filed under Columns

Your dealership’s total sales aren’t always within your control. However, you can manage many of your expenses, and controlling expenses in today’s market is crucial.
Strong sales have a way of camouflaging elevated expenses, but when sales slow, inflated expenses must be closely examined.
Dealership expenses usually fall into two main categories: fixed expenses and variable expenses. Fixed expenses include rent, phone, power, Internet, etc. and are generally very difficult to reduce. The good news is with strong attention to detail, it’s realistic to decrease your variable expenses enough to make a significant impact on your bottom line. One of the biggest variable expenses that dealer principals or general managers can focus on is payroll.
For example, let’s focus on sales department payroll percentage. That percentage is usually measured by taking the total amount of the sales department payroll and dividing it by the sales department’s total gross profit. Sales department payroll typically includes a dealership’s salespeople, floor and sales managers and any other person that’s exclusively dedicated to the sales department. It usually does not include your finance manager. On a side note, many dealerships compensate their sales manager on F&I sales, and this portion should not be included in sales department payroll expenses.
As an example, let’s say a dealership sells 100 units in a month at $1,000 front-end gross profit per unit sold, which comes to a total of $100,000 in gross profit. If this dealership’s total payroll expenses for the sales department was $40,000 for that month, their payroll percentage would be 40 percent. In other words, 40 percent of the sales department’s gross profit was utilized for payroll.
The benchmark for sales department payroll percentage is 22 percent of gross profit, which is a savings of $18,000 per month based on the numbers above. That’s a savings of $216,000 in one year just by properly managing your sales department’s payroll percentage.
So, now the question is how do I distribute the budgeted amount of payroll and get a maximum return on that investment? This is determined by well thought out pay plans based on your dealership’s data. Pay plans vary widely depending upon region. For instance, a Southern California dealer can more easily have a commission-only pay plan, but a dealer in Massachusetts will typically have to utilize a salary plus commission pay plan. With a salary plus commission pay plan, it is recommended the salary not exceed 50 percent of total pay. A salary that’s equal to one-third of anticipated earnings is ideal.
One of the greatest ways to modify someone’s behavior is to modify their pay; this is the purpose of commission-based pay plans. You can design pay plans to move aging inventory, complete required dealership training or even reward seniority. One dealership actually sets aside $10 for each unit a salesperson sells and pays it on their date-of-hire each year. This promotes increased salesperson retention. Considering that many salespeople don’t even make it to the one-year mark, this might be a great idea for your dealership.
A well engineered pay plan will reward top performers and weed out under achievers. Whatever pay plan you choose, make sure it isn’t over-engineered. It can be counter-productive if it’s too confusing or if it takes management too much time to compute each pay period.
For some dealerships, that savings of $216,000 in one year by properly managing their sales department’s payroll percentage could be the difference of being $100,000 in the red or $100,000 in the black for 2008.
About this column
Series goal: Each Profit Ability column will focus on one key measurable found in most dealer 20 Group’s composite reports and offer tips on improving those measurables.
This edition: Sales department payroll percentage
National average: The national average for a dealership’s sales department payroll percentage is 22 percent of gross profit, according to a recent RPM Group Composite Report.

Tory Hornsby, general manager of Dealership University, was drawn to the powersports industry more than 10 years ago when he turned his passion for motorcycles into a career. Hornsby worked in nearly every position in the dealership before becoming a general manager. He welcomes your e-mail: thornsby@dealershipuniversity.com.

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