Authored by David Dubois, along with Joe Bueti and Ann Torno
It is easy to lose sight of the big picture when you are dealing with the day-to-day upheaval and difficulties of running an automotive business. Between the month-end close, sales tax deadline, floor plan check, and any number of other worries, it is hard to make the time to take a step back and really see how your business is performing. We are not merely talking about how many cars you sold last month, or your customer feedback, we are talking about specifically aligning your goals and future needs with your dealership’s financial performance.
This article is Part 1 of a 3-part series discussing how specific business area metrics can help you identify how your business is performing, and then, based on those key performance indicators (KPI), you can focus on those areas that could use some attention.
Day Supply of Inventory (COGS / Average Inventory * 365)
This performance indicator measures the number of day’s that capital is tied up in inventory. When this number gets too high, it could mean an increased carrying cost on your floor plan expense, and frozen capital which reduces your return on investment. It could even mean increased rent if there is a need for an additional storage lot. When this number is too low, it could mean lost sales opportunities due to lack of a selection of inventory. It could also mean additional expense of swap costs, to fulfill customer orders on cars you don’t have on your lot.
Average Units Sold per Salesperson (Units Sold / Average # of Salespeople)
This performance indicator measures the average number of vehicles sold for each salesperson. If this metric gets to be too high, it could mean lost sales opportunities due to not having enough salespeople to handle the showroom traffic. Too high can also mean lower gross profit since the salespeople do not have enough time with the customer to sell the vehicle at a higher margin. Not enough salespeople to handle showroom traffic can also result in excess waiting times for customers, which will lower your customer service index (CSI) score. If this metric were too low, it could mean excess idle time for sales staff, which would result in excess wages you don’t need to be paying.
Average Gross Profit per Unit Sold (F&I Gross Profit / Units Sold)
This performance indicator measures how well you are incorporating F&I products into your vehicle sales. Too high of a metric could mean the F&I department is being over aggressive, which in turn will lead to more chargebacks on the back end. Too low of a metric would mean more missed opportunities to sell. This could be from a lack of effort from the F&I department, or the lack of time available to spend with each customer.
Penetration Rate on Service Contracts (Contracts Sold / Total Units Sold)
This performance indicator is another way to measure how well you are incorporating F&I products into your vehicle sales, or how many cars you were able to add F&I products to, compared to total number of units sold. If this metric is too high, it could mean aggressive selling, and again result in higher chargebacks to follow. Too low, it could mean an ineffective selling practice. It could indicate that 100% of the products available are not being presented to 100% of the customers.
The best way to have these metrics serve you is to find the optimal balance for each one and for your dealership. Part 2 of this series will present labor metrics and how service department benchmarks can help your dealership. Ask your professional accounting advisor to discuss key performance indicators and benchmarking with you, to get your business headed in the direction you want it to go.