Dealership Financial Statement Analysis: The Advanced Course

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Dealership Financial Statement Analysis: The Advanced Course With Ron Sompels, CPAstrong Moderated by Mike Bowers, Executive Editor at DealersEdge Thursday, February 27, 2014 1 2:30 pm ET Ron

1 Dealership Financial Statement Analysis: The Advanced Course With Ron Sompels, CPAstrong Moderated by Mike Bowers, Executive Editor at DealersEdge Thursday, February 27, :30 pm ET Ron Sompels, CPAstrong Ron Sompels, CPA: Ronald Sompels is a partner at Crowe Horwath LLP, a top 10 public accounting and consulting firm. Mr. Sompels, a CPA and CPIM, is the Partner-in-Charge of Crowe s Retail Dealer industry horizontal and has more than 30 years experience in providing assurance, tax, risk management, financial advisory, and performance consulting services to more than 600 retail dealerships. He has conducted courses on many subjects, including inventory control, and is a published writer, with articles featured in trade magazines, periodicals, and business journals. Mr. Sompels holds a Bachelor of Business Administration in Accounting from Western Michigan University.

operating statement contains the majority of the dealer income!

2 How to Read and Analyze the Dealership Financial Statement Ron Sompels, Partner Crowe Horwath LLP Operating Statement Before reviewing the operating statement you should understand that under Dealership Accounting many items get buried in Other Income Often this line in the operating statement contains the majority of the dealer income! Need to understand what is in here Packs Incentives Doc fees Other items Also understand the Dealership s policy of Accounting for manufacturing assistance Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 4

Other Income Reclassifications Other Income/Other Deduction Balances Dealership: Sample Toyota Store Account # Account Name Line on Fin Stmt YTD Balance Reclass to: 5121New Vehicle Pack Other Income

3 Other Income Reclassifications Other Income/Other Deduction Balances Dealership: Sample Toyota Store Account # Account Name Line on Fin Stmt YTD Balance Reclass to: 5121New Vehicle Pack Other Income (150,700) New Vehicle Gross 5221Used Vehicle Pack Other Income (236,290) Used Vehicle Gross 9140Doc Fees-New Other Income (300,196) New Vehicle Gross 9145Rental Income Rental Income (4,940) Leave Other Income 9150Misc Income Other Income (292,195) New Vehicle Gross 9151DT Holdback Other Income - New Vehicle Gross 9152Bad Debt Writeoff Other Income 8,853 Bad Debt Expense 9155Haz Mat Shop Supply Other Income (3,099) Service Gross 9240Doc Fees-Used Other Income (176,709) Used Vehicle Gross 9420Credit Card Discounts Other Deductions 7,991 Misc Expense 9440Cash Discount Other Deductions - Leave Other Income 9450Misc Income-Svc Other Deductions (1,410) Service Gross 9470Rental Vehicles Other Deductions 15 Leave Other Deductions 9480Misc Deductions Other Deductions 7 Leave Other Deductions Total Other income/deductions (1,148,673) New Vehicle Gross (743,091) Used Vehicle Gross (412,999) Service Gross (4,509) Total (1,160,599) Other 11,926 Total Other income/deductions (1,148,673) Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 5 Departmental Operating Analysis There are several ways that the Manufacturer s statements present this. Most show a Total Dealership column which includes Sales Gross Profit Itemized List of Expenses Expenses are listed in various categories Selling Expenses Personnel Expenses Variable Expenses Departmental Operating Expenses Semi Fixed Expenses Overhead Expenses Fixed Expenses Expenses are also measured as percent to total gross, per new vehicle sold, or percent to total sales The same format is used to show each department s expense which adds to the total Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 6

Departmental Operating Analysis Problems No common format makes it difficult to compare stores No comparative data or benchmarks Many of the expenses (mostly fixed in nature such as insurance, rent,

Need a better way to manage Many Dealers have a tool they use to analyze their statements. Ask them for it!

4 Departmental Operating Analysis Problems No common format makes it difficult to compare stores No comparative data or benchmarks Many of the expenses (mostly fixed in nature such as insurance, rent, or others such as employee benefits or payroll taxes) are difficult for department managers to control. They are allocated to the departments based on square footage or personnel cost. Need a better way to manage Many Dealers have a tool they use to analyze their statements. Ask them for it!! Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 7 Departmental Operating Analysis A good analysis tool will... Contain comparative data Analyze contribution margin by department Analyze controllable expense as a percent to gross Segregate fixed costs Compare to benchmarks Suggest separating expenses into two categories Controllable Expenses Non Controllable Expenses Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 8

5 Departmental Operating Analysis New and Used Vehicle Departments - Controllable CONTROLLABLE EXPENSES Commissions Advertising & Promotion Supervision Interest - Floorplan F&I Compensation and Expense Demos/Company Vehicles Other Salaries Prep, Deliver & Policy Other Controllable Expenses * Total Controllable Expenses * Includes Equipment, Other Supplies and Training Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 9 Departmental Operating Analysis New and Used Vehicle Establish Benchmarks as a % to Gross Profit % of Total Gross CONTROLLABLE EXPENSES New Used Commissions 24.0% 23.0% Advertising & Promotion 12.5% 13.0% Supervision 10.0% 10.0% Interest - Floorplan 0.0% 1.0% F&I Compensation and Expense Demos/Company Vehicles 2.0% 1.0% Other Salaries 3.5% 3.5% Prep, Deliver & Policy 2.0% 2.0% Other Controllable Expenses * 1.5% 1.5% Total Controllable Expenses 55.5% 55.0% * Includes Equipment, Other Supplies and Training Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 10

6 Departmental Operating Analysis Fixed Operations Departments - Controllable CONTROLLABLE EXPENSES Salaries & Wages Advertising Demos/Company Vehicles Policy Adjustment Tools & Supplies Other Controllable Expenses * Total Controllable Expenses * Includes Equipment, Other Supplies and Training Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 11 Departmental Operating Analysis Fixed Operations Departments - Controllable % of Total Gross CONTROLLABLE EXPENSES Serv. Parts Body Salaries & Wages 34.0% 28.0% 34.0% Advertising 2.5% 4.0% 2.0% Demos/Company Vehicles 1.0% 2.0% 1.0% Policy Adjustment 2.0% 0.5% 2.0% Tools & Supplies 7.0% 1.5% 3.0% Other Controllable Expenses * 2.0% 2.6% 1.5% Total Controllable Expenses 48.5% 38.6% 43.5% * Includes Equipment, Other Supplies and Training Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 12

7 Departmental Operating Analysis Other Non Controllable Expenses % of Total Gross EMPLOYEE EXPENSES Salary Administrative 3.0% Employee Benefits 3.0% Payroll Taxes 4.0% Total Employee Expenses 10.0% INSTITUTIONAL EXPENSES Institutional Advertising 0.0% Insurance 2.0% Office Supplies 0.7% Taxes - Other 3.0% Total Institutional Expenses 5.7% SERVICES Data Processing 1.7% Outside Services 2.9% Professional Services 1.0% Total Services 5.6% Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 13 Departmental Operating Analysis Other Non Controllable Expenses % of Total Gross FACILITY Telephone 1.0% Utilities 2.5% Insurance - Building 0.0% Repairs and Maintenance 0.0% Taxes - Real Estate 0.0% Total Facility 3.5% MISCELLANEOUS EXPENSES Depreciation 1.5% Interest 1.0% Miscellaneous 0.5% Travel & Entertainment 0.5% Other General & Administrative 0.0% Total Miscellaneous Expenses 3.5% Total Before Rent 28.3% Rent & Equivalent 7.0% Total Non-Controllable Expenses 35.3% Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 14

8 Departmental Operating Analysis Make Comparable CONTROLLABLE EXPENSES Bench % of Gross March April May Commissions 23.0% 320, % 435, % 410, % Advertising & Promotion 13.0% 177, % 172, % 154, % Supervision 10.0% 275, % 428, % 456, % Interest - Floorplan 1.0% % 0 0.0% 2, % F&I Compensation and Exp 58, % 82, % 73, % Demos/Company Vehicles 1.0% 20, % 21, % 28, % Other Salaries 3.5% 8, % 9, % 11, % Prep, Delivery & Policy 2.0% 35, % 52, % 56, % Other Controllable Expenses * 1.5% 8, % 3, % 11, % Total Controllable Expenses 55.0% 905, % 1,206, % 1,204, % Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 15 Gross Profit Analysis New SALES - UNITS Benchmark Dec 2011 (YTD) Per unit Dec 2012 (YTD) Per Unit Dec 2013 (YTD) New Car - Retail New Truck - Retail Total New Units GROSS New Car - Retail ,401,260 9,506 3,030,597 5,470 4,333,460 7,951 New Car Incentives (Memo Only) 4,179,152 (0) 2,775,825 (0) 3,969,179 0 New Truck - Retail , (140,785) (843) 120, New Truck Incentives (Memo Only) New F&I , , , Fleet & Other New ,144 5,005 25,110 Total New Gross 5,044,864 5,720 3,359,067 4,659 5, ,933 Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 16

9 Gross Profit Analysis Used Benchmark Dec 2011 (YTD) Dec 2012 (YTD) Dec 2013 (YTD) SALES - UNITS Used Car Retail Used Car Retail - Certified Used Truck - Retail Used Truck - Retail - Certified Wholesale Total Used Units 728 1,151 1,236 GROSS Used Car - Retail 1, ,403 4, ,968 3, ,321 2,162 Used Car - Retail - Certified - 949,615 3,753 1,496,346 3,191 1,459,827 2,908 - Used Truck - Retail 1, Used Truck - Retail - Certified Wholesale - 214, , ,663 1,334 Used F&I , , , Other Used Total Used Gross 2,183,898 5,301 3,165,446 4,477 3,080,199 4,550 Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 17 Gross Profit Analysis Service SERVICE SALES Benchmark Dec 2008 (YTD) Dec 2009 (YTD) Dec 2010 (YTD) Customer Pay 2,647, % 3,151, % 3,401, % Warranty 1,438, % 1,005, % 900, % Internal 421, % 528, % 515, % Sublet 330, % 216, % 245, % Other 245, % 251, % 255, % Total Service Sales 5,083, % 5,152, % 5,318, % GROSS PROFIT Customer Pay 72.0% 2,066, % 2,515, % 2,758, % Warranty 72.0% 1,093, % 783, % 701, % Internal 69.0% 307, % 379, % 377, % Sublet 7.0% 78, % 67, % 66, % Other 0.0% 126, % 125, % 113, % Unapplied (-) 0.0% (3,747) -0.1% 0 0.0% 0 0.0% Total Service Gross 3,668, % 3,872, % 4,016, % Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 18

10 Gross Profit Analysis Parts Benchmark Dec 2008 (YTD) Dec 2009 (YTD) Dec 2010 (YTD) PARTS SALES Customer Pay 2,344, % 2,814, % 2,748, % Warranty 1,918, % 1,339, % 1,347, % Internal 208, % 335, % 288, % Wholesale 631, % 700, % 674, % Counter 192, % 169, % 153, % Other 717, % 862, % 994, % Total Parts Sales 6,012, % 6,223, % 6,207, % GROSS PROFIT Customer Pay 40.0% 959, % 1,165, % 1,119, % Warranty 27.0% 540, % 394, % 416, % Internal 20.0% 35, % 66, % 54, % Wholesale 23.0% 147, % 166, % 176, % Counter 34.0% 70, % 59, % 61, % Other 20.0% 122, % 131, % 162, % Parts Adjustment 0.0% % (66,820) -1.1% (100,735) -1.6% Total Parts Gross 30.0% 1,875, % 1,917, % 1,890, % Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 19 Other Metrics That Are Helpful Sometimes it is helpful to look at controllable expenses on a per unit basis Commissions (new and used) Advertising (new and used) Supervision (new and used) Also make sure periods being analyzed are comparable. (Annualize results if necessary) Other measures that are helpful New and used vehicle and parts inventory days supply Floorplan to Inventory Ratio CIT/VR days supply; P&S receivable days supply; Warranty receivable days supply; Finance Receivables days supply Avg. Cost of used retail units sold to Avg. (FIFO) cost of units in inventory Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 20

Other Information in the Statements Be careful because much of the information is based on Memo Accounts which are inputted monthly Receivable Analysis Inventory Analysis Hourly Labor Rates for

11 Other Information in the Statements Be careful because much of the information is based on Memo Accounts which are inputted monthly Receivable Analysis Inventory Analysis Hourly Labor Rates for Technicians Labor Hours Repair Order Counts Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 21 Other Information in the Statements 1 Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 22

23 Other Information in the Statements 3 Audit

12 Other Information in the Statements 2 Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 23 Other Information in the Statements 3 Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 24

25 Other Information in the Statements 5 Audit

13 Other Information in the Statements 4 Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 25 Other Information in the Statements 5 Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 26

14 Key Benchmarks by Department Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 27 Key Benchmarks by Department Audit Tax Advisory Risk Performance 2014 Crowe Horwath LLP 28

15 DEALERSHIP OPERATIONAL GUIDES

16 OPERATIONAL GUIDES The 50 Operational Guides list the critical items under the direct control and influence of the dealership managers. They can be measured monthly and all will eventually be incorporated into the quarterly budget review process. These guides are established both for the dealership and by department, and will be reviewed on a regular basis to make sure they remain relevant. Dealerships should measure their progress towards these targets. Once a specific target has been met then other areas can be addressed. The controller, comparing actual results to these guides, should investigate and report monthly on significant variances. Department managers, in conjunction with the management staff, should initiate any changes necessary. DEALERSHIP MANAGEMENT GUIDES Target Actual Actual YTD 1 Cash in bank plus securities 60 days of exp. 2 Return on Controllable Assets 35% 3 Net Profit as a % of Gross Profit 20% 4 Net Profit as a % of Sales 2%+ 5 Fixed Coverage - (From GM Statement) Dealerships w/o Body Shops 70% Dealerships w/ Body Shops 85% 6 Total Gross per employee Dealership $7,500 DEALERSHIP EXPENSES 7 Variable Expense as a % of Variable G/P 26% 8 Personnel Expense as a % of Total G/P 33% 9 Semi Fixed Expense as a % of Total G/P 20% 10 Fixed Expense as a % of Total G/P 16% NEW & USED VEHICLE 11 Vehicle Sales per salesperson per month C.S.I. Scores Eq. to region 13 New Vehicle Inventory Days Supply Used Vehicle Inventory Days Supply Manager to sales person ratio 1:6 16 Gross Profit per employee Showroom $8, Used Cars retailed as a % of total retail sales 50% 18 Used Cars wholesaled as a % of total used car sales (wholesale plus retail) 50%

17 FINANCE & INSURANCE 19 Gross F&I Income per retail unit sold $ Net F&I Income per retail unit sold $ Finance Reserve $ to Total F & I Inc. as a % 60% 22 Combined Extended Warranty Penetration 60% 23 Retail units sold per F&I Manager 75 SERVICE DEPARTMENT 24 Gross as a % of Labor (Adj. Cost of Lbr) 73% 25 Retained Income after Controllable Expense 45% 26 Service Writer Comp. as a % of Gross Profit less than 10% 27 Support Personnel to Technician Ratio 1:3 28 Technician productivity - Import 120% Domestic 110% 29 C.P. Hours per R.O Service Gross per employee $6, C.S.I. Scores Eq. Region 32 Policy Expense as a % of Service Gross 2% or less 33 Supply Expense as a % of Service Gross 3% or less YTD Target Actual Actual

18 DEALERSHIP MANAGEMENT GUIDES Target Calculation Method 1 Cash In Bank plus Securities 60 days of expenses 1) YTD Expenses. 2) Divide by # of calendar days YTD to get a daily expense rate. 3) Divide cash in bank amount by result of step #2 2 Return on Controllable Assets 35% 1) Total Assets, less Notes Payable-Vehicles, less Other Assets, less Cash and Securities. 2) Annualize Net Income YTD 3) Divide result in step #2 by #1 3 Net Profit as a % of Gross Profit 20% Divide Total Net Profit by Total Gross Profit. 4 Net Profit as a % of Sales 2% Divide Total Net Profit by Total Sales 5 Fixed Coverage - (From GM Statement) Dealerships w/o Body Shops 70% Dealerships w/ Body Shops 85% 6 Total Gross per employee - Dealership $7,500 1) Use YTD Gross Profit. Divide by number of months YTD. 2) Divide by the number of full time (or equivalent) employees in the Dealership. DEALERSHIP EXPENSES 7 Variable Expense as a % of Variable G/P 26% Divide Variable Expenses (w/o F&I). by Variable Gross Profit 8 Personnel Expense as a % of Total G/P 33% Divide Personnel Expense by Total Gross Profit. 9 Semi Fixed Expense as a % of Total G/P 20% Divide Semi Fixed Expense by Total Gross Profit. 10 Fixed Expense as a % of Total G/P 16% Divide Fixed Expense by Total Gross Profit.

19 NEW & USED VEHICLE Target Calculation Method 11 Vehicle sales per sales rep per month 10 Divide Actual Retail units by # of Salespeople on Financial Stmt. 12 CSI scores Equal to regional scores 3 Months Rolling 13 New Veh. Inv. Days Supply 45 1) Number of New Vehicles retailed over the last 3 months 2) Divide by 90, to get an average sale per day. 3) Divided number of Vehicles in inventory by the result of step #2. 14 Used. Veh. Inv Days Supply 45 1) Number of Used Vehicles retailed over the last 3 months 2) Divide by 90, to get an average sale per day. 3) Divided number of Vehicles in inventory by the result of step #2. 15 Manager to sales rep ratio 1:6 16 Gross profit per employee -Showroom $8,500 1) Use YTD Gross Profit. Divide by number of months YTD. 2) Divide by the number of full time (or equivalent) employees in the Sales Department. 17 Used cars retail as % of total retail units 50% 1) Number of Used Vehicles retailed over the last 3 months 2) Divide by Total number of Retail Sales (New & Used) 18 Used cars wholesale % of used car sales 50% 1) Number of Used (wholesale plus retails) Vehicles wholesaled over the last 3 months 2) Divide by Total number of Used Sales (wholesale plus retail)

20 FINANCE & INSURANCE Target Calculation method 19 Gross F&I Income/retail unit sold $600 All retail units plus leases 20 Net F&I Income per retail unit sold $400 All retail units plus leases 21 Finance Reserve $ as % of F & I Income 60% 22 Combined Extended Warranty Penetration 60% 23 Retail units sold per F&I Manager 75 SERVICE DEPARTMENT 24 Gross profit as a % of Labor 73% After adj. cost of labor 25 Retained Inc. after Controllable Exp. 45% 1) Service gross (with parts transfer) Less: Personnel, Company vehicle exp., other supplies, advertising, policy, data processing, outside services, training, bad debts 26 Service Adv. Comp. as a % of Gross less than 10% Service gross with parts transfer 27 Support Personnel to Technician Ratio 1:3 28 Technician productivity - Import 120% Hours flagged divided by hours available Domestic 110% 29 C.P. Hours per R.O Service Gross per employee $6,000 Use YTD gross pr. (without parts transfer) 31 C.S.I. Scores Equal to region 3 month average 32 Policy Exp. as % of Service Gross 2% or less Without parts transfer 33 Supply Exp. as a % of Service Gross 3% or less Without parts transfer

21 PARTS DEPARTMENT 34 Parts sales per employee (or equivalent) 1) Use monthly YTD sales w/o wholesale $37,500 2) Divided by # of full time or equivalent Parts w/ wholesale $47,500 employees 35 Parts Gross per employee (or equivalent) $12,500 1) YTD parts gross (no transfer) divide by # months YTD 2) Divide by # parts employees per the financial statement 36 Retained Income after Controllable Exp. w/o wholesale 40% Less: same expenses as service plus freight w/ wholesale 30% 37 Inventory Days Supply less than 45 days Use G.L. inventory for parts compared to 3 months average cost of sales for parts only 38 Six months no sale inventory less than 10% 39 True turns (From Parts Management Rept) 6 BODY SHOP Target Calculation method 40 Gross profit as a % of Labor 65% After adj. cost of labor 41 Net profit as a % of Gross Profit 30% With parts transfer inc. in gross 42 Sales per Support Personnel $25, Body Shop Gross per employee $5,500 Monthly based on YTD sales 44 Retained Income after Controllable Exp. 35% Less same expenses as parts 45 Technician productivity 185% 46 Paint/Material Sales/Customer Labor 17% 47 Paint/Material Cost plus Splies to Customer Lbr Sales 14% 48 Capture Ratio on estimates written 85% ADMINISTRATIVE 49 Total Gross per employee Office $50, Manager to Office Employee Ratio 1:7

22 DETERMINE IDEAL STAFFING LEVELS USING GROSS PER EMPLOYEE TARGET STAFFING LEVELS BY DEPARTMENT USING MANAGEMENT GUIDES SHOWROOM GROSS PROFIT - AVERAGE MONTH - NEW $154,000 GROSS PROFIT - AVERAGE MONTH - USED $99,000 GUIDE - GROSS PER EMPLOYEE $8,500 CALCULATION 30 SERVICE DEPARTMENT GROSS PROFIT - AVERAGE MONTH $184,322 GUIDE - GROSS PER EMPLOYEE $6,000 CALCULATION 31 BODY SHOP DEPARTMENT GROSS PROFIT - AVERAGE MONTH $76,274 GUIDE - GROSS PER EMPLOYEE $5,500 CALCULATION 14 PARTS DEPARTMENT GROSS PROFIT - AVERAGE MONTH $61,542 GUIDE - GROSS PER EMPLOYEE $12,500 CALCULATION 5 TOTAL DEALERSHIP GROSS PROFIT - AVERAGE MONTH $605,460 GUIDE - GROSS PER EMPLOYEE $7,500 CALCLULATION 82

Dealership Financial Statement Analysis: The Advanced Course

Dealership Financial Statement Analysis: The Advanced Course With Ron Sompels, CPAstrong Moderated by Mike Bowers, Executive Editor at DealersEdge Ron Sompels, CPAstrong Ron Sompels, CPA: Ronald Sompels