Trade Secrets To Finding Lost Profit – Part 2

In my last newsletter I shared with you that number one on my hit list for lost profit can be found in your Service Department.  It should be the highest grossing department in your dealership but finding lost profit doesn’t stop there.

Number 2 on my hit list is the Parts and Accessories Department.  You would be amazed how much more income you can put to the bottom line with just a little tweaking.

For those of you who are regular readers of my newsletters, you have probably gathered that a lot of my insight and advise comes from analyzing my dealer client’s statements on a regular basis. 

Patterns begin to form from one year to the next and sometimes even from month to month. I know for a fact what the industry standards are for profitable dealers, which helps me to zero in on lost profits.

As a result I have found that another area for significant lost profits can be found in the Parts and Accessories Department.  These are actually two different sales areas but I will address them as one for now.

Profit in your P & A Department all boils down to your gross margin.  Sales volume will be pretty much governed by your unit sales from month to month.  That’s not to say you can’t generate sales from walk-ins or service related work, but volume as a percent to unit cost of goods sold will usually follow the same pattern as your unit sales.

The industry standard for profitable dealer’s parts margin in both Marine and Motorsport is between 32.0% and 34.0% and it is not unusual to see some dealers reaching upwards of 40.0% margin.  This should not be confused with mark-up.  This is your profit or net income divided by gross sales.

Accessories can vary depending on your supplier, their purchasing programs and the competitiveness of the accessories you sell.  If you are selling branded snowmobile suits for example, it is much easier to hit your margin objective than if you are selling generic snowmobile clothing that can be found at Walmart.  Regardless, the rule of thumb is you should be earning between 30.0% and 32.0% gross margin.

To put this in perspective let’s assume you are selling annually $700,000 in parts cost of goods sold.  If you are only earning a 28.0% margin, that’s a difference of 6 points to a reasonable target margin of 34.0%.  That 6.0% on a cost of $700,000 in real dollars represents $88,384 in lost income.

This is all fine in theory, but the question is why are you earning 28.0% and not 34.0% margin?  The answer may be that you simply don’t know what margin you are earning and trust what your point of sale system is generating.   

On the other hand you may think that this is the best that you can generate for your Parts sales.  I am here to tell you that your are leaving profit on the table based on what industry standards dictate you should be earning.

Here are 5 things you should do to ensure your are maximizing your Parts & Accessories margins.

  1. Pricing:  This first and most important step is to check your point of sale system to ensure you have the right margin set for the sale of your product.  This can get out of sync if you have not updated your inventory with costing changes or manufacturer price increases.
  2. Rebates/Discounts:  You should make sure that any program rebates or discounts are reflected in your cost of goods sold when inventorying your parts and accessories purchases.  This is not something you should account for at point of sale because you may have the same part and two different cost of goods sold.
  3. Discounting:  Review your policies on discounting over the counter and for add-ons to unit sales.  Your staff should have a clear understanding of what your discount policies are and when then can use them.
  4. Giveaways:  Free merchandise or complimentary giveaways have their place but again, your staff should have a clear understanding of when this policy comes into effect.  Customer goodwill is a great thing but can get out of hand very quickly.
  5. Theft:  This is something that should always be high on your radar.  None of us want to think that customers or staff would steal from your dealership, but it happens with greater frequency that you may think.  If your pricing is right, and discounting and giveaways are within your dealership policy and your are still having trouble achieving your margin objective, take a good look for missing inventory.

P & A sales are your second highest grossing product in your dealership so make sure you are earning the best margin possible.  If you need or want help assessing your margins, contact me for a free consultation.

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