Seeing Is Believing: A Case Study

In recent articles, I have written about the need for dealership owners to become Financial Managers, but what does that mean?  Financial management can have a number of definitions, but essentially it means analyzing your year end and monthly statements in detail so you can understand how your company is performing and make timely adjustments to be more profitable. 

As the saying goes, "just because you say it's so - does not make it so" and as I wrote in my last article, you as business owners have an obligation to be sceptical of any new service that is introduced to the market.  Consequently, I wanted to share the success of one of my clients to demonstrate the power of being a Financial Manager.

My client prided himself in being one of the leaders in the industry in sales volume for all of his manufacturers.  He had enjoyed considerable success after many years in business but admittedly said his focus was on marketing and selling product, which left a lot of money on the table from unclaimed rebates and lack of expense control.

Enter the recession and by the end of 2009 things had spiralled out of control.  Now this recent recession was no fault of our own and was impossible to predict, but without the tools to make monthly adjustments, the results have been catastrophic. 

I started with preparing a Financial Performance Analysis that provided a 3 year trend analysis of my client's fiscal year end statements and a 2 year margin analysis of his in-house statements.  At the end of the analysis we had a clear picture of the company's:

 

  •          Liquidity
  •          Debt equity
  •          Profit
  •          Inventory
  •          Individual expenses
  •          Individual unit margins
  •          Parts & Accessories margins
  •          Service margins
  •          F & I

The reasons for the company's 2009 low 6 figure loss and year to date break even position for 2010 were now obvious.  Sure my client knew he had too much inventory along with some of his expenses being excessive, but how much was too much?  We discovered that inventory turns were only 1 ("one") per year.  Inventory should turn between 3.5 and 4 times per year which told us that the company had enough units in stock to almost supply an entire year's sales.  By identifying this we concluded that the company needed to reduce inventory by 50% to achieve the targeted turns per year.

Salaries and floor plan interest expense were 4% of gross sales over their target percentages.  On the up side, the sales volume percentage by product group of gross sales was right on industry norms and margins were better than industry expectations.  This told us that while gross sales were down significantly due to the recession we did not need to focus on sales margins since they were above average for the industry.

Armed with this information we built a two year business plan that was prepared in the following order:

  •          Establish Goals and Objectives for the company
  •          Set Strategies to achieve profit goals.
  •          Set target dates to achieve the strategies
  •          Forecast unit sales by product group
  •          Build a business plan work sheet for sales, cost of goods sold and
  •            expenses
  •          Extract a Balance Sheet, P & L Statement and Cash Flow Sheet

It goes without saying that the adjustments that were built into the plan would not happen over night.  A realistic time line was built into the strategies to bring the company's ratios and percentages in line with industry expectations and to meet the profit goals.

Through my client's diligence to work the plan he turned a breakeven year into a mid 5 figure profit, which was right on target with the plan and with all the adjustments now in place the company is targeted for a mid 6 figure profit in 2011. 

This is not a result of increased sales or margins and in fact sales targets have been reduced.  This is the result of reducing inventory by 50% over a 5 month period, reducing salaries by 3% of gross sales and the effect of reducing inventory will substantially reduce interest expense in the coming months. 

These results are just the highlights of what a change in business management philosophy has accomplished for this owner.   The key to success is to now track the company's financial performance each month and adjust accordingly to meet the business plan.

My client's situation is not out of the ordinary considering the recession we have all endured, but regardless of whether you have suffered losses or just want to enhance your profitability, financial management is your key to success. 

Interested but need help?  Contact Me

Comments (1)

  1. BachJohann

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