If you’re like many dealership owners and managers, you spend so much time dealing with the day-to-day tasks involved in running the business that it’s hard to see the big picture. In other words, you miss the proverbial forest for the trees.
One of the best ways to avoid this scenario is to perform a comprehensive review of your dealership’s operations. An operational review is a thorough, in-depth analysis and critique of all aspects of your dealership’s operations.
Targeting areas for improvement
Conducting an operational review will enable you to identify areas where your dealership can improve. With this knowledge, you can determine what steps to take to make these improvements. And implementing these steps can enhance performance, increase profitability and boost your dealership’s value!
Your dealership can realize a wide range of benefits by conducting an operational review, including:
- Greater operational efficiency,
- Streamlined processes,
- Higher productivity,
- Lower costs and overhead, and
- Stronger cash flow.
An operational review also can lead to better financial forecasting and more accurate budgeting. In addition, it can result in better inventory management and enhanced internal controls, which can help prevent employee fraud and embezzlement.
Zeroing in on key areas
A dealership operational review typically focuses on these key areas:
The deal jacket trail. Randomly choose a few recent vehicle sales and for each one follow the deal jacket’s trail through your dealership from start to finish. At most dealerships, the jacket follows a well-worn path that is often wrought with inefficiencies.
Scrutinize your deal jacket trail, looking for ways to streamline the paperwork process while making sure proper procedures are being followed every step of the way. Your goal should be to reduce your “frozen capital,” or cash that’s tied up in contracts in transit. The faster vehicle paperwork is processed, the quicker you’ll receive cash for vehicles sold.
Vehicle inventory management. Proper inventory management is always a balancing act for dealerships. You want to keep enough of the right vehicles on hand to meet customer demand without stocking too many slow-moving vehicles that take up space on your lot and pump up carrying costs.
Faster inventory turns mean higher dealership profits. So carefully track your inventory turnover and decide what to do with vehicles that aren’t moving — whether this means leasing, wholesaling or continuing to discount them.
Internal controls and fraud prevention. Many dealership owners and managers don’t realize how susceptible they are to internal fraud. An operational review can identify areas where your dealership may be especially vulnerable. A review also will assess the adequacy of internal controls that can help prevent fraud, such as segregation of financial duties.
Employee compensation plans. Different dealership employees are compensated in different ways. Therefore, it’s important to periodically re-examine your compensation plans to ensure they’re providing the right incentives based on your overall dealership goals. Your compensation plans may require adjustment periodically to keep your employees focused on activities that will produce your desired outcomes.
Cash flow and cash management. Although collecting accounts receivable generally isn’t a massive problem for dealerships, this doesn’t mean there aren’t related steps you can take to boost your cash flow. This is especially true in your parts and service department. For example, parts and service invoices should be issued in a timely manner and credit policies should be enforced on a consistent basis. Aggressively pursue collection of past-due payments.
Also follow manufacturers’ instructions and procedures carefully when completing warranty paperwork to avoid payment delays and accelerate cash flow. Similarly, be careful when completing manufacturers’ paperwork for receiving Sales Performance Incentive Fund (or SPIF) bonuses, because delays here will hamper cash flow.
Seeking out expertise
It often makes sense to bring in outside expertise, such as a CPA or accounting professional, to conduct an operational review. A professional who has conducted operational reviews for other dealerships will be able to bring a high level of industry expertise to the engagement.