Sometimes business owners get so wrapped up in the day to day doing of their business they lose sight of the mistakes they’re making and don’t stop to think about how they can make critical changes to improve their business and enhance their profitability.

Such was a case with an owner, investor who had a full line Motor Sport and Marine dealership.  He came to us asking for our help as he’d had been losing vast amounts of money for the last 4 years.

The dealership was in a good location with a more than adequate geographic marketing area in which to operate.  The building looked very respectable and products were well displayed.  So why the consistent and sizeable losses each year?

The owner was convinced the problems were with his expenses. Salaries were too high, overhead was too expensive, and his interest expense was excessive – these primary  among other expense issues he felt. He had a plan to reduce his expenses but wanted another opinion on the status of the business.  We analyzed his year end statements for the last three years and discovered significantly different problems from those that the owner suspected.  We then requested the dealer’s last two years in-house statements in order to analyze the individual line items for each product group and the corresponding cost of sales.

We discovered that the dealer’s inventory turns were well below industry average for the last three years. This translated into excessive carryover and floor plan interest expense.  We further discovered that margins on the sale of new units were again, far below industrial average.

Margins on used units from trade-ins was almost non-existent and income from the business office (retail finance, insurance and extended warranty) was well below par for the volume of sales. Contrary to what the dealer told us, labour/salaries were well within the normal range for the volume of sales, the same with marketing cost, rent and general overhead expense.

We discussed the owner’s business philosophy and found the root of the problem.  His policy was you can’t sell it if you don’t have it in quantity and sales volume was the source of profitability

We advised the owner that high sales volume without well managed inventory was a formula for disaster. So we ran two scenarios with his store manager, the first based on the owner’s beliefs and philosophy - with some reductions in expense, and the second = based on our advice.

In the dealer’s scenario we were able to reach a breakeven bottom line for the year.In our scenario we called for a reduction in sales from $4.5 million to $3.8 million, a reduction of 30% in unit inventory (increasing inventory turnover from 2.5 to 4.5 per year), an increase in new unit sales margin from 7% to 9% and an increase in used units margin from 5% to 12%.  Our scenario returned a profit of $150,000.

There were a number of forces at work in this situation. With excessive inventory and the prospect of high carryover, the sales staff and management felt the pressure and panic to “sell, sell, sell” and therefore sacrificed margin/profit.  They would take in trades at excessively high value which precluded them from selling their used product at a reasonable margin.  They sacrificed income in their back office to make the sale. Their business philosophy lead to excessive carryover, high floor plan interest expense, high noncurrent sales that were lowering margins and high storage costs and damage from unit carryover.

The outcome?

Unhappily yet inevitably the dealer was forced to close his business and declare bankruptcy. Unhappily? It needn’t have happened if the dealer had followed our advice and recommendations. Inevitably? Well, as noted thinker and author Stephen R. Covey points out”If we keep doing what we're doing, we're going to keep getting what we're getting.”

Comments (1)

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