Farming and the farm equipment business are and always have been cyclical businesses. That’s sometimes easy to forget, especially coming off a few really good years like we are now. But the cycle will turn down and the only question is when. Read more to find out what the top farm equipment dealers are doing about this.
Click to download the full article by George Russell How Top Performing Dealers Prepare for a Down Turn in PDF format.
Rental is an interesting area to examine from a strategic point of view. Let’s look at rental growth in the last 20 years. In 1987, did you consciously make the decision to enter into the rental market? Consciously make the decision to commit a certain amount of funds to rental? Did you establish specific financial benchmarks for rental operations and continuously monitor progress against those goals to adapt, change, and improve? Or, did you get into the rental business as a reaction to certain factors?
What we’ve seen as a consulting firm is that most heavy equipment dealers are in rental not due to established strategic focus, but as a reaction to certain situational drivers.
Want to read more? Click to download the full article Financial Benchmarks to Drive Rental Profitabilityin PDF format.
Click Get the Most Profit From Your Dealership to read this artice in PDF format by George Keen, as featured in Power Retailer
This is an interesting article written by George Keen in 2008. Click Forklift Equipment Rental to download the Article in PDF format.
Now that we have defined the big buckets on the financial statement, let’s get back to uncovering whether you have a service operating expense issue or a gross profit issue. The biggest challenge I come across in performing the reviews with dealers/distributors is in how they are accounting for Service Recovery Items. These items are what you are charging your customers for service vehicles, shop supplies, hazardous materials disposal, etc. Let’s look at the example below.
| Service Labor Revenue | $ 1,050 | 100.0% |
| Cost of Goods Sold | $ 375 | 35.7% |
| Gross Profit | $ 675 | 64.3% |
| Personnel Expense | $ 215 | 20.5% |
| Operating Expense | $ 160 | 15.2% |
| Occupancy Expense | $ 55 | 5.2% |
| Total Dept. Expense | $ 430 | 41.0% |
| Department Profit | $ 245 | 23.3% |
At first glance you would conclude that there is a major issue with Operating Expense due to the fact that is over 5% out of line with the CMC model. Other areas of the department such as Gross Profit is less than 1% off model. This is not very uncommon to see in many of our Best Practice Groups.
But when we dig further you discover that $50 of Service Labor Revenue is actually revenue associated with charges such as mileage, zone charge, EPA, shop supplies, etc. that are common in most distribution companies. The CMC model would place those items not in Revenue but as a contra expense account under Operating Expenses. Now let’s look at what that does to the financial statement.
| Service Labor Revenue | $ 1,000 | 100.0% |
| Cost of Goods Sold | $ 375 | 37.5% |
| Gross Profit | $ 625 | 62.5% |
| Personnel Expense | $ 215 | 21.5% |
| Operating Expense | $ 110 | 11.0% |
| Occupancy Expense | $ 55 | 5.5% |
| Total Dept. Expense | $ 380 | 38.0% |
| Department Profit | $ 245 | 24.5% |
The bottom line figure of $245 did not change but we are now much closer to identifying the bigger issue. Operating Expense went from being off 5.2% down to 1%. Occupancy Expense stayed relatively the same but Personnel Expense jumped up 1%. But the biggest jump occurred in Gross Profit. It went from being off model by 0.7% to being off 2.5%. We have a bigger revenue and productivity issue and less of an expense recovery issue.
This happens in other departments as well. Think about the same exercise when it comes to Parts Freight Expense & Recovery. If you put the Recovery under Parts Revenue and the cost under Parts Operating Expense, you think you are doing well in margin but it is inflated.
So if you are wrestling over what you think is a Service Operating Expense issue, make sure you are accounting for the recovery items correctly. Place them down as contra accounts and match them up with the actual expense.
Service Department: Operating Expense Problem? Or is it really Gross Profit?
In completing dozens of expense reviews for our dealer/distributor clients, I came across this issue on almost every occasion. When interviewing key managers, more often than not both the service managers and the controller were in agreement that they had an Operating Expense issue in the Service Department. They also were in agreement that they had no idea how to solve the problem. What I discovered on most of the reviews was the issue was not in expense control but was really a service gross profit challenge. Before we get too far down the road let’s define what we mean when we say Operating Expenses and Gross Profit.
As our clients will tell you, Currie has developed a financial model for distribution companies through our research and development projects with manufacturers. From there we have refined the financial model over the years through our experiences with the Currie Best Practices Groups. The Service Department Financial Model is as follows:
| Service Labor Revenue | $ 1,000 | 100.0% |
| Cost of Goods Sold | $ 350 | 35.0% |
| Gross Profit | $ 650 | 65.0% |
| Personnel Expense | $ 200 | 20.0% |
| Operating Expense | $ 100 | 10.0% |
| Occupancy Expense | $ 50 | 5.0% |
| Total Dept. Expense | $ 350 | 35.0% |
| Department Profit | $ 300 | 30.0% |
This excerpt is Part One of a Two Part series.