Calculating Net Profit and Fixed Absorption
[I]An Automobile Dealer Education Institute (ADEI) management reminder[/I]The first step to reaching service potential in a dealership is knowing where you stand, and where you should stand. This means making sure that expenses are in proportion and under control. To determine this, use your financial statement to subtract total expenses from total gross; the result is your net. As a rule of thumb, personnel expenses (which may appear on your statement as personnel, variable, or selling expense) should amount to 45-50 percent of the gross. All other expenses should run 25-30 percent of the gross. In general, successful service departments should net 20 percent after absorbing their share of administrative or indirect expenses. If your expenses are greater than 80 percent, and the culprit is not gross retention, concentrate on lowering expensescommon costs to rein in include shop supplies, policy work, uniforms, and parts washers. You can achieve a 20 percent net; like a small increase in gross, a small decrease in expenses can have a big impact on sales needed to make your best net.
Fixed absorption is yet another area to scrutinize. Fixed absorption is the extent to which the fixed departments (service, parts, and body shop) can cover the entire dealerships adjusted overhead expense (i.e., total dealership expense less expenses directly attributable to vehicle salescommission, delivery, and policy). Absorption, important in any sales climate, becomes critical when vehicle sales slide. Variable income flow goes down, but expenses increase. The more of the debt load you can take off variable operations, the easier it is for them to sell vehicles. Aim for as close to full (100 percent) absorption as possible.
If your absorption is low, look at your grossing patterns. Service should be holding 70 percent, parts should be holding 38 percent, and body shop should be holding 65 percent on labor, 30 percent on paint and materials. If youre holding gross in all these areas, examine expenses. Advise the general manager or sales manager if you find that the service department is in the position of absorbing costs it cannot control, (i.e., floor plan interest and advertising of aged inventory).
Calculate your fixed absorption using the numbers from your financial statement in this formula:
[I]Gross profit (parts dept + service dept + body shop) à dealership overhead expense = absorption percentage[/I](Thanks to NADA University for the research on this article.)
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