KPMG Motor Industry Services

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1 KPMG Motor Industry Services Motorcycle Newsletter August 2018 kpmg.com.au 2018 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo and are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

2 Investing money in a business (or any investment or asset) is done with the goal of achieving a return on the money invested. It is important to know whether you are getting a good return on your investment and this is normally achieved by benchmarking the return to the stock market broadly (S&P ASX 200 or All Ords) or to specific market-segments or bond indexes. Similarly for investors in motorcycle dealerships, understanding industry averages and best practice returns is important to ensure you re getting the benchmark return on your dealership investment. How is your motorcycle dealership investment performing? Are you making a benchmark returns on your investment? And how do you find out? This month s newsletter aims to help you understand whether the dealership is making the returns that its investors expect or should when compared to benchmarks for investing in a motorcycle dealership. Irrespective of whether you have invested $100,000 or $2 million you want to make sure your money is working for you. There are three indicators that we will show you in this month s newsletter that will enable an investor to know how their dealership investment is performing in terms of generating a return on investment. These 3 indicators are: 1 Return on Assets (%) Measures what your investment is generating as a return on the assets invested. 2 Gross Profit as a return on sales (%) Shows the level of gross profit the dealership achieving on its sales. 3 Net Profit as a return on sales (%) Measures how much of the gross profit earned on sales is retained at the bottom line profit before tax (PBT) for the dealership.

3 One of the most important links between all three indicators above is how well the business converts sales to gross profit and how much it retains as PBT. We must be aware that best practice dealers have many levers in their dealership to drive their results with some examples being; competent, happy, and high performance staff higher levels of customer satisfaction and retention. The three indicators we outline in this month s newsletter are the milestones on a dealership s journey to achieving benchmark performance. They are effectively the starting point to measure and understand how the business is performing and what the potential overall opportunities are in the dealership.

4 Return on Assets Return on assets measures your dealership net profit before tax as a percentage of the total assets invested in the business. Similar to how you would measure returns invested in a savings account or the share market. For example, if you have $200,000 invested in a savings account at an interest rate of 2 percent, 2 percent is your return on assets. Similarly, if you had $200,000 invested in the stock market and you returned $20,000 over a 12 month period from dividends and share price growth, your return on assets is $20,000 / $200,000; or 10 percent. For a motorcycle dealership, the calculation is no different just a little more detailed. First, get a clear and accurate view of your PBT and then divide it by the total assets employed in the dealership. Normally for a motorcycle dealership, the assets would normally include the stock (new and used motorcycles, parts, accessories and merchandise), the debtors, fixed assets, and potentially would also include any goodwill paid to acquire the business. If the assets in the balance sheet of the business total $500,000; and the net profit before tax for the year is $25,000; the business has made a Return on Assets of 5 percent. That is: Net Profit Before Tax / Total Assets * 100 = Return on Assets $25,000 / $500,000 * 100 = 5% Or you could say for every $100 you have invested in the business, it is making you $5. There is a calculation sheet at the end of this newsletter that will show you how to make these calculations. What do Best Practice motorcycle dealers achieve as a return on the assets invested in their businesses? Best practice dealers look to achieve a return on assets of 8 percent or more. This shouldn t be confused with your return on equity, which is the money you have invested in the business rather than the assets employed. Given a dealership often floorplans its bike inventory, equity is often substantially lower than assets employed and returns on equity over 50 percent are common and considered benchmark performance. Dealership Gross Profit After reviewing Return on Assets, the next step is to understand the Gross Profit of the dealership; - or how much money does the business make from each sale. There is a saying in the industry that turnover is vanity and gross profit is sanity. This is very true, as sales without the required levels of gross profit can be considered as loss making turnover. Gross Profit, by definition, is the company s total revenue (sales dollars) minus direct Cost of Goods sold. A best practice motorcycle dealership will make a gross profit margin of at least 23 percent. That means for every $100 of sales in the business, gross profit is $23 or more. It tells us how well we convert revenue into Gross profit. For example, if the business has $500,000 in sales for the month and grosses $100,000: Gross Profit (%) = Gross Profit / Total Sales *100% = $100,000 / $500,000 *100% = 20% Dealership Net Profit (Before Tax) We also call this the bottom line, and it is by definition what is left after taking the dealership expenses away from the gross profit. As an example, if a dealership makes $1,000,000 of sales in a month, and has a net profit before tax of $50,000; it has made a net profit for the period of 5 percent. Typically, an average motorcycle dealership will make an annual net profit before tax of approximately 2 percent of sales; Best practice dealers generally are 4-5 percent of sales and upwards. In the next page we will go through a case study.

5 Case Study Let s look at two different dealerships the first Go Fast and the second being Hurricane. In the table below, we provide a high level summary of the dealerships financials: Balance Sheet Go Fast Hurricane Now we can review the three KPIs discussed in the newsletter: Gross Profit (% of sales) Go Fast Hurricane Motorcycle Best Practice (%) Cash in Bank Parts & Merchandise Inventory New and Used Motorcycle Inventory $5,000 $20,000 $150,000 $100,000 $400,000 $400,000 Provisions $0 $20,000 A Sales Revenue B Gross profit B A Gross Profit (% of sales) Net Profit (% of sales) $4,000,000 $ 600,000 15% Go Fast $4,000,000 $800,000 20% 23% Hurricane Best Practice (%) Land & Buildings $750,000 $0 Total Assets $1,305,000 $540,000 A Sales Revenue C Net profit C A Net Profit (% of sales) $4,000,000 $ 50, % $4,000,000 $200,000 5% 4-5% Profit Statement Go Fast Hurricane Return on Assets Go Fast Hurricane Best Practice (%) Total Sales Income $4,000,000 $4,000,000 Less Cost of Sales $3,400,000 $3,200,000 D Total Assets E Provisions F Land & Buildings $1,305,000 $ 0 $ 750,000 $540,000 $ 20,000 $ 0 Gross profit $600,000 $800,000 G=D-E-F Adjusted Total Assets $555,000 $520,000 Total Expenses $550,000 $600,000 H Annualised Net Profit $50,000 $200,000 Dealership Net Profit (Before Tax) $50,000 $200,000 HH DD Return on Assets 3.8% 5% >8% HH GG Adjusted Return on Assets 9% 38% >30%

6 Top 3 tips to improve your return on assets. Our earlier newsletters (available on our website), provide thoughts on improving profitability. All these points can help improve profits and return on assets. But three key points to focus on are: 1. Effective Inventory Management Inventory is an asset, which if not managed correctly will generate a poor return for the business. Effective inventory management has a direct correlation with improved gross profits. The longer a motorcycle or part has been in stock, generally the lower the gross profit achieved. Working to turn inventory over quicker will reduce the amount of inventory on the balance sheet and assist to generate improved gross profits. 2. Well balanced business Ensure the dealership is well balanced in terms of where gross profit is generated. Best practice motorcycle dealerships generate about two thirds of their gross profit from service and parts. Ensure your dealership has a good balance between gross generated between the front end (new and used) and the back end (service & parts) of the dealership. 3. Maximise your opportunities Maximise the opportunities in each department. Work to generate extra gross on each transaction; and measure and follow up the opportunities the dealership doesn t convert. For example, if we sell a motorcycle to 1 in every 4 prospective customers, what are we doing to convert the other 3 opportunities to a sale? Explanations: Net profit (as % of sales) How much money the dealership makes from the sales it achieves. This net profit is before tax. Assets Everything the business owns, this figure excludes any loans. Items include: cash, bank accounts, new and used motorcycle inventory, parts and accessory inventory, merchandise inventory. Return on assets How much money (net profit) the business makes on the assets the business owns. Adjusted return on assets Not all motorcycle dealerships own the land and buildings in the business, or account for provisions and accruals. To allow a better comparison of all motorcycle dealers, the adjusted return on assets, removes these numbers if present in the accounts. In the case study above, the 3 performance indicators show that Hurricane is generating a better return than Go Fast. For example, if go Fast was to generate a net profit (as a percent of sales) of 5 percent, it would have a net profit of $200,000 instead of only $50,000 That is another $150,000 a year or an extra $12,500 per month. This would also increase the return on assets to 36 percent. We have provided a blank case study worksheet to put your own numbers in and compare to best practice.

7 Balance Sheet Cash in Bank $ Parts & Merchandise Inventory $ New and Used Motorcycle Inventory $ Provisions $ Land & Buildings $ Total Assets $ Profit Statement Total Sales Income $ Less Cost of Sales $ Gross profit $ Total Expenses $ Dealership Net Profit (Before Tax) $ Gross Profit (% of sales) A Sales Revenue $ B Gross profit $ B A Gross Profit (% of sales) % Net Profit (% of sales) A Sales Revenue $ C Net profit $ C A Gross Profit (% of sales) % Net Profit (% of sales D Total Assets $ E Provisions $ F Land & Buildings $ G=D-E-F Adjusted Total Assets $ H Annualised Net Profit $ HH DD Return on Assets % HH GG Adjusted Return on Assets %

8 We hope this newsletter has helped show how to measure your dealership s results. For tips on how to improve your return on assets, gross profit, and net profit please refer to the concepts discussed in our previous newsletters as they will assist you. Should you wish to view our previous newsletters, please visit our website: tomotive.html If you need assistance in completing the worksheet, or finding out where the missing opportunities are in your business, please contact Rohan Meyer at or Steve Bragg at If you have any questions, please feel free to contact us at mis@kpmg.com.au

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10 Contact us If you would like more information contact: Rohan Meyer Senior Manager Motor Industry Services rmeyer1@kpmg.com.au Also, meet the broader KPMG Motor Industry Team: Wayne Pearson National Leader - Motor Industry Services wpearson1@kpmg.com.au Gary Ormond Senior Manager Motor Industry Services gormond@kpmg.com.au Johanna Rutherford Senior Manager Motor Industry Services rjohanna@kpmg.com.au Bill Noye KPMG Partner Enterprise Advisory & Tax wnoye@kpmg.com.au Bruce Sinclair KPMG Partner Enterprise bdsinclair@kpmg.com.au Aidan Cousin Senior Accountant Enterprise acousin1@kpmg.com.au Henry Pedersen KPMG Consultant - Enterprise Hpedersen1@kpmg.com.au Steve Bragg KPMG Director Motor Industry Services sbragg1@kpmg.com.au David Pring KPMG Partner Enterprise Tax davidpring@kpmg.com.au Stephen May KPMG Partner Enterprise Audit smay@kpmg.com.au Aaron Street KPMG Partner Enterprise Advisory & Tax astreet@kpmg.com.au Ian Kowalski KPMG Partner AKL PE ikowalski@kpmg.co.nz Laura Pestell Learning Coordinator Enterprise lpestell@kpmg.com.au Patrick Jabbour Accountant Enterprise pjabbour@kpmg.com.au KPMG.com.au The information contained in this document is of a general nature and is not intended to address the objectives, financial situation or needs of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to influence a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise) KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo and are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.