Sept. 26, 2005 – “My Numbers Don’t Change”
September 26, 2005
Filed under Features
Ever wonder about your financial reports? When you get them (assuming you do!) do you leave them sitting on the desk to be looked at “when I have time, because they don't change anyway?”
Your financial statements are the pulse of your dealership. What is contained in them is forensic evidence that screams “look at me!” So let's take a look, and then you can decide if it's worth the time.
The Income Statement, sometimes called the Profit and Loss, tells you how you did this month and also this year to date. Let's face it, the first thing we do is go right to the bottom line and see if we made any money. There it is, Net Income. If you made money or not the answer is right there. But did you look at what made up that number?
There are two key totals on all income statements. The first is Gross Profit (sales minus cost of goods), and the second, Net Profit (Gross Profit minus Expenses). While your Net Profit might not change there is always information in the income statement that can lead to better (read: more profitable) operations.
The year end income statement is the sum of the twelve fiscal or calendar operating months. If January is the first month of your year, and you see that you earned $50,000 before taxes, would you be pleased? Imagine now if there were a 1% decline in net income for your second month February, for a decrease of $500. Would you be concerned? Probably not, might not even notice. Let's continue the scenario, how about 2% for a total of $1,000? Or perhaps 3% for $1,500 for February? Many of us would not notice it or pay any attention to it. But if that small 3% were to continue for the next 12 months the total is $18,000 right off the bottom line! A 36% drop! I would notice that.
Most changes in financial statements happen over a period of time, and it is hard to see it coming. I have seen net income stay the same from month to month, but sales are higher and the store is busier. What has happened? I am selling tons of parts and more units then ever but I am not making more money! Look at the income statement. Have your wages increased? Is more being spent on advertising? Are we discounting too much? Have costs gone up but not our sales or our prices? Something is eating the profits. Compare your financial statements from one month to the next and you will find the culprits.
The P&L measures your effectiveness at buying goods and selling them. But the Balance Sheet shows how good you are at managing what you have, and what you have to deal with: Your Assets and your Liabilities.
Look at the balance sheet. The Equity section tells how much value the business has accumulated over time. Every Balance Sheet has just three sections. They are Assets, Liabilities and (the difference), Equity. Inventory is often the largest asset (note: For you guys that have cash as your largest asset, your problems are beyond the scope of this article). Watch the numbers, compare the inventories. Are they growing too much too fast? How is the cash? Is it where you think it should be? How much do you owe to creditors and vendors? The liability section will tell you that. Compare the accounts payable to receivables, and floor plan to floored inventory. Are they about where they should be?
There are accounting tools that can help. An easy test of a business's ability to meet obligations is called the current ratio. That ratio is the total of current assets divided by the total of current liabilities. What it says is - “Do I have enough liquid assets to pay the bills?” My Uncle Jerry runs sheep here in Utah. A lot of sheep. Payday for his ranch hands is on Friday, and sometimes on Thursdays I see him on the phone until midnight. Oats, wheat, corn, hay, ewes, lambs, water shares-any inventory he can sell is turned to cash-all to meet payroll on Friday. If you have $2 in hay today for every $1 needed for tomorrow's payroll, you will probably make it. Anything less than that means your probably scratching for cash and may have some mad ranch-hands on pay day. And there is nothing worse than a mad ranch-hand!
Another financial measure is Return On Investment. Find the annual net income from the income statement and divide it by the total assets averaged for the year. Most retail stores are anywhere between 8 - 12 percent. If your ROI drops you are losing your touch, and you need to get this thing back into the groove.
Last, look at your departments. Too often we focus only on the total dealership. The dealership is made up of a few big departmental chunks. New, Used, Parts, Service, F&I, Motorclothes-each one should be closely examined and required to answer and explain. Try to come up with three or four questions for each department. Why did cost of goods sold increase in the service department but sales did not? If one goes up, shouldn't the other? Now there's a question for that manager to chew on.
No matter what you do, first of all require that your statements are accurate. And second, read them! Sit with your accounting person and review the statements on a certain set date. The 10th or 15th is reasonable. Do this, and you will find that perhaps when your numbers do not change, that could be the greatest worry of all.
- Jeff Hardy