See the Big Picture: Improve Dealership Performance with Benchmarking

December 14, 2018

Successful dealerships tend to keep close tabs on their finances and operations by measuring and monitoring certain performance metrics. Doing so helps managers spot trends that could negatively impact performance and make adjustments before it’s too late.

But these metrics have little meaning when viewed in isolation. A basis of comparison is needed to provide context and relevance to the numbers.

Benchmark against performance standards

The process of comparing financial and operational performance to an objective standard is referred to as benchmarking. Performance comparisons can be internal — such as against previous months, quarters or years — or external, such as against other similar dealerships.

Benchmarking enables active oversight and assessment of your dealership’s overall performance. And this leads to higher sales and profits! It also can help identify unusual financial activity and spot potential fraud. In addition, benchmarking can help pinpoint underperforming employees and departments and take steps to boost their productivity.

Choose your metrics

The first step in performing a benchmarking initiative is to decide which metrics to focus on. The following are some sales metrics that are often measured and monitored in each dealership department:

Days supply of inventory.

This will tell you how many days of capital are tied up in your vehicle inventory. If it’s too high, you could pile up increased carrying costs in the form of higher floor plan expense. If it’s too low, you might lose sales opportunities because of the lack of vehicle selection. The formula:

Cost of goods sold /
Average inventory x 365

Average vehicles sold per salesperson.This will help you gauge the performance of each member of your sales team. If it’s too high, you might need to hire more salespeople to handle excess customer traffic. If it’s too low, you may have excess salespeople who aren’t busy enough. The formula:

Retail vehicles sold /
Average number of salespeople

There are also F&I metrics:

F&I penetration rate. This will tell you how many vehicle sales included an F&I component, such as a service and maintenance contract. If it’s too high, your salespeople could be using overly aggressive tactics, which could result in high F&I chargeback rates. If it’s too low, your salespeople may not be selling F&I products effectively. The formula:

F&I contracts sold /
Total retail unit sales

Net F&I income before compensation per retail unit sold. This metric indicates how much income you are making on your F&I products after chargebacks per retail unit sold and will help to identify pricing strategies, as well as higher than normal chargeback numbers. The formula:

Net F&I income before compensation /
Retail units sold

And here are some parts and service metrics:

Labor hours per repair order. This will tell you how many labor hours are being sold per repair order. If it’s lower than the benchmark, there are potential service sales that are being missed. The formula:

Total labor hours /
Total repair orders

Percentage of nonstock parts held in inventory. This will tell you how many special-order parts you carry in stock compared to standard parts. If it’s too high, customers may not be returning to have service work completed. If it’s too low, your parts department manager could be returning stock parts before customers return for service work. The formula:

Nonstock parts inventory /
Total parts inventory

With the appropriate metrics in hand, the next step is to compare your metrics to relevant benchmarks. Start with internal comparisons. For example, how does your current days’ supply of inventory compare to such inventory in the same period a year ago? Or how does your current F&I penetration rate compare to last quarter’s rate?

Then compare your metrics to relevant industry standards, such as similar-size dealerships that sell comparable vehicles. Your accounting firm or a Dealer 20 Group is one good source for this kind of data. State and local dealer associations, NADA and your manufacturer may also be able to provide relevant benchmarks for your dealership.

A valuable exercise

Benchmarking is a valuable exercise for helping dealerships improve financial and operational performance. Plan a meeting with your managers to discuss how you can put benchmarking to work at your store.

Keep an eye on these 3 dealershipwide metrics

In addition to department-specific metrics, you may also want to measure and monitor some overall dealership financial metrics. These could include:

Total gross profit per employee. Labor is usually one of a dealership’s biggest variable expenses, so this is an important metric to keep an eye on. It could help you determine whether your dealership is over- or understaffed. Certain positions won’t be appropriate for this metric.

Return on assets (ROA). Assets include receivables and vehicle and parts inventory; computers, equipment and fixtures; and real estate. ROA will reveal how efficiently you’re using these assets to generate net income.

Return on equity (ROE).
This is a measurement of profitability in relation to the owners’ total investment in the dealership. It will show you how well you’re using investment capital to grow income.

© 2018