Sales vs. Salaries - The Secret Formula!
If I we're to ask you "what is your highest expense on your Profit & Loss Statement"? You would say "that's easy - salaries". But the BIGGER question, in order to maximize your profitability, is "do you know what your salary/wages expense should be as a percentage of gross sales"? If you don't, then you could be in big trouble!
Knowing the relationship between sales and salaries is one of the best profit identifiers available to you and can mean the difference of thousands of dollars in bottom line income. The trick is balancing the needs of your dealership and your customers with the number of staff you can affordably employ based on your gross sales.
You will find that in analyzing this key percentage there are sales volume break points that make it very difficult to meet the desired ratio between gross sales and salaries.
Let's say you can effectively run your dealership, and hit the target salary expense ratio, with 5 people based on $2,000,000 in gross sales.
What happens if your gross sales increase to $3,000,000 and to adequately service that volume you must add 3 more employees. The problem now is that the total salary expense, based on 8 staff, is well in excess of what your sales volume can support.
Consequently, you must decide whether you can increase your sales volume to justify the additional staff or maintain your $2,000,000 sales volume with the staff you have. It is all about maximizing your profit - not simply sales volume. Just because you increase sales does not mean you will increase profit. Often you will experience the reverse result.
Here's the secret to knowing your correct target – read this paragraph twice!!
Take your total salaries/wages expense including benefits, and divide that number by your gross sales (new units, used units, parts, accessories and service), which is usually the first line of your P & L Statement called Sales.
Multiply that by 100. Your target percentage should be 9%. If your percentage result is higher than 9% then you must decide whether you can increase sales volume to bring your salaries/wages expense in line with the target or reduce staff and maintain your sales volume.
This "secret formula" is so effective I guarantee I can tell whether a dealer is profitable or not just based on this percentage without even looking at the bottom line. After analyzing thousands of dealer financial statements it became apparent to me that the most profitable dealers were all operating within the 9% range, which validates this "secret formula". Take a few minutes of your time and try this. You may be very pleasantly (or unpleasantly) surprised at the result!
Need help performing this test? Contact me
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"When it comes to Finance and Commercial Credit, he is one of the most knowledgeable people I know. No one I know has more in-depth experience or understands distribution finance better than Chris"
- Joe Conte, Canadian Counsel, Textron Financial Canada Limited
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