Building Business Acumen in Your Dealership

							Dealership Financials – The Basics

As we visit with dealers and engage with team members, we occasionally ask the
question “how much do you believe dealers make in profits?” The response to this varies
from 50% to 5% of sales. As we delve further, we find that many do not understand the
fundamentals of how the business makes money.

Since the primary purposes entrepreneurs invest their time and money in a business are to
drive profitability and the ability to grow for the future, we are starting our financial
series on the basics. The primary goals of this segment are to bring perspective to how an
average dealer makes profit, what is an average dealer profit margin, and how each
member in the company can impact this.

Dealerships measure business performance through the income statement. The income
statement gathers all revenue sources, subtracts the direct costs of sales (Cost of Goods
Sold or COGS), subtracts selling, general and administrative expenses (SG&A), and
adjusts for other miscellaneous items (i.e. interest, discounts, etc). The income statement
is based upon a specific timeframe (one month, year to date, full year). The attached
example income statement reflects a dealer income statement based upon benchmarking
percentages from data collected throughout our dealership network.

Revenues are primarily driven from sales of product and services (installation, design,
project management, warehousing, etc.). Dealerships that have the most sustainable
profits have a mix of customer types (Global/Government/Transactional) across several
segments of the community (Corporate, GSA, US Communities, etc). They further view
services as a revenue source that allows recovery of costs and a boost to overall
profitability.

COGS are the direct costs of providing each of the income sources. The most direct of
these is product costs which are the prices paid to the manufacturer. Other costs of
product delivery and/or services are also captured in this category. It’s important to note
that errors and inefficient processes in the dealership (specification, damages, rework,
etc) can significantly impact the overall costs and profitability.

Gross Profit (GP) is the result of subtracting COGS from revenue. Our statistics show
that an average installed GP (Installed GP definition here?) is 19.5%. This varies by
product line/type and is usually measured separately for effective use in managing the
business. GP and sales volume are the primary measure for sales effectiveness within a
dealership.

SG&A (sometimes referred to as Core Expenses) are those expenditures that are not
directly associated with sales. These are the “entry fee” for doing business. There are
certain costs which are somewhat fixed and those that are variable or fluctuate with sales
volume. Some fixed type expenses are rent, utilities, legal, administrative, and fixed
asset depreciation (expensing the costs of a long life asset overall it’s useful life).
Variable expenses include expenses like support salaries, marketing materials, office
expenses, travel, commissions, bonuses, etc.


Other income / expense include items such as manufacturer discounts for early payment,
interest income or expense, taxes, etc. This can work to enhance or detract from the
owner’s overall return. Making sure that all manufacturer discounts are taken greatly
increases the bottom line return since there are no additional costs associated with this
revenue source. On the contrary, interest expense on loans to cover expenditures,
working capital, or other expenses can greatly detract from returns.

Net Income is the bottom line return for the owner’s investment. This return is usually
compared to alternative investments (stocks, deposits, etc) by the principal.

A company is considered “Break Even” when it’s GP covers the SG&A and
miscellaneous income/expense. This base level establishes the sales volume and GP%
required to stay afloat and more importantly drives to the desired profitability or return
for the business owner.

Every member of the dealership can affect profitability. Consider the following break
even examples based upon a hypothetical dealership with a 20% GP:

       -         A travel/entertainment expense of $1,000 requires sales of $5,000 to
                 cover that cost (not including profit on this sales volume).
       -         A $60,000 employee (fully loaded with benefits) requires sales of
                 $300,000 to cover that cost. Considering that the business also needs a
                 return on its sales volume, this figure increases to $315,000 (5% return
                 (gross profit) before SG&A load).
       -         Renewing a showroom lease for $250,000 ($50,000 depreciation
                 expense over 5 years) requires sales of $1,250,000 over 5 years to
                 breakeven.
       -         A specification error of 1% on a $1,000,000 sale drops the GP by a
                 similar amount. This $10,000 of lost profit requires an additional
                 $50,000 of sales to recover (plus sales needed to generate the required
                 owner’s return on investment).
       -         Savings on outside services of 1% on a project where 25% of the project
                 sell is services will drive an addition .25% to the bottom line.

We’ve included a sample income statement that represents the average percentages by
category for Preferred dealers throughout our network. We selected an average monthly
sales figure of $2 million to provide perspective on the various components of the income
statement. All figures are for illustration purposes only.

We are hopeful that this segment provided insights into how a dealership makes a return
on the owner’s investment. Should you have comments or wish to discuss this topic
further, please send me an email Dan.Zona@Haworth.com.
Upcoming segments will provide a more in-depth look at the income statement, balance
sheet, forecasting, and planning/budgeting.
Thanks gain for logging on and more importantly for your business partnering with
Haworth!
Dealer Income Statement Example

Note: Percentages are based upon average performance of Haworth dealers. Dollar
amounts are for illustration purposes only.

Revenues:                                                             % of sales
      Product                      1,600,000                            75.0%
      Design                         100,000                              5.0%
      Installation                   250,000                            12.5%
      Warehousing                     50,000                              2.5%
              Total Revenues                     2,000,000             100.0%

Cost of Goods Sold (COGS)
       Product                     1,310,000                            65.50%
       Design Services               100,000                             5.00%
       Installation Services         175,000                             8.75%
       Warehouse costs                25,000                             1.25%
               Total COGS                        1,610,000              80.5%

Gross Profit by product line
      Systems                         190,000
      Seating                         100,000
      Design                                0
      Installation                     75,000
      Warehouse                        25,000
              Total Installed GP                   390,000              19.5%

Selling, General and Administrative
       Selling Expense                             184,800              9.24%
       Occupancy Expense                            35,400              1.77%
       Office Expense                                22,600             1.13%
       Administrative Expense                      110,000              5.50%
               Total SG&A                           352,800            17.64%

Operating Income                                   37,200               1.86%

Other Income and Expenses
       Other Expense                               (13,000)              .65%
       Other Income                                 18,400              .92%
Net Income                                          42,600             2.10%