How to Recognize Your Four Main Profit Killers

There are four key areas of your recreational products business operations you must pay strict attention to if you are not going to fall prey to your “Four Profit Killers”.  Find out right now what they are.

Those of you who have worked with me know that I am a big advocate of knowing, understanding and applying industry targets to your business model to maximize profitability. 

When you apply these targets to your business plan after analyzing your financial statements you elevate your profit potential tenfold.  When the following four targets are out of sync with your financial results you are at the mercy of your Profit Killers.

  1. Salaries: Salaries expense is the single biggest expense you have on your P & L so it follows that if your staffing is not in tune with your annual Gross Sales it will have the biggest impact on killing profit. I must caution you that when you do this calculation you must make sure that your salaries expense includes all staff except your Service Technicians. Service Technicians or mechanics are a cost of sale to your Service Department.  The best way to assess your staffing requirements is to multiply your Gross Annual sales target that you set in your business plan by 9%.  This will give you a budget amount for salaries for the year.  You should then monitor this monthly and make adjustments based on your actual sales volume.
  2. Inventory:  Inventory is a little more difficult to manage but if you monitor your average turns per year plus your interest expense as a percentage of gross sales, you will have the right tools to control this Profit killer.  If your Interest & Bank Charges is over 2.5% of gross sales you can safely assume you have excessive carryover inventory that is costing you profit.Similarly, if your average turns are under 2.5 times per year, again you will know your inventory is out of sync with gross sales.  One trick I have learned that helps with managing inventory is to maintain an average of 50% of gross sales in unit stock in each product group.  This will vary between high and low season so the average is what you want to achieve.
  3. Margins:  Obviously margins are sensitive to your market place. I constantly hear that buddy down the street is selling for just over cost, which prohibits you from making a reasonable margin.  I guarantee you that if your competition is selling for cost they won’t be in business for long.  They may be selling for a low margin such as 6% at face value, but then there is PDI, Freight, and Documentation fees tacked on resulting in an overall margin of 11%.  Consumers only tell you the unit cost and fail to disclose the extra charges they paid. Parts and Accessories should be a no brainer, but invariably I see margins like 28% on parts.  Considering the target for Parts is 34% and many dealers exceed this, anything under this margin is throwing away profit.
  4. Service:  The Service Department is an area in which I see many dealers having a problem.  If you are not consistently checking your rate of billable hours and efficiency ratio you will be susceptible to underachievement in the Service Department. When you look at profitable dealers in the industry it is apparent that 60% to 70% margin is the bench mark for success.  Consequently, you must ensure that your Technicians are not sitting idol and are completing jobs within the prescribed time frames.  This requires daily, weekly and monthly review or you are opening yourself up to another Profit Killer.

You can easily recognize and deal with these four Profit Killers by analyzing your monthly and annual financial statements and then setting goals in your business plan to address the deficiencies.  This is your investment in future profitability.

If you need or want help in analyzing your financial data to eliminate these Profit Killers, contact me for a free consultation.

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