According to Warren Buffet, “Application and improvement of some modern accounting and financial techniques are fundamentally changing the company’s ability to make a profit.” Can you consider your DMS a modern accounting technique? What makes a DMS system a contributor to profitability?
During the past few years, I’ve been giving seminars on profit accounting and how it differs from the type of bookkeeping that many dealerships use. As an office manager, I thought my job was to send out reports that pointed out the mistakes of my fellow managers in the parts, service, and sales departments. I’d create lists of past due accounts, over-aged vehicles in stock, and low technician productivity.
There was a point in my career that I realized two things; most of my reports were boring and ignored and if my report caused a person to get fired, the replacement was usually the same as the last one.
I needed to create profit-focused reports that showed my dealer and managers the “why” of things that were wrong. For example, instead of a report of technicians with low productivity, which is a “what” report, I’d create reports that show the reasons “why.” I’d drill down into the problems with parts availability, training, dispatching, skill levels, favoritism, lack of tools, etc. Another “what” report is a list of deals with low gross profit. A better “why” report is a grouping of the deals; vehicles that were trade-ins from new or used, days in stock when sold, make and model, how much reconditioning was done, appraised value when brought into stock, which bank financed the deal, F&I manager etc.
“Office Managers and Controllers need to become part of the operational team and a true contributor to profit.”
There are specific reasons why we have deals at a lower gross profit, but it means digging to find those reasons. Using my accounting background, I developed a breakeven analysis, customized for our industry. I studied how we made money and found the key five profit areas and then the dozens of profit points that branch off of those key areas. I developed metrics and reports that help managers improve their profit points and gave them the “why” when financial performance didn’t meet the metrics. I compared operational reports to the financial reports and found variances, and then developed methods to prevent chargebacks and adjustments. Office Managers, CFOs and controllers need to become part of the operational team and a true contributor to profit. This is what it means to utilize modern profit accounting techniques.
This brings us back to the question of how to use your DMS to increase profitability. The first step is to better understand profit accounting. You probably didn’t realize that your DMS has two accounting systems: financial and operational. A report in CRM or the F&I summary of last month’s deals and gross profit is “operational.” It is rare that this total gross profit will show up on page four of your financial statement. Same with a report of service and parts gross in the service department menu; there are dozens of things that cause that gross profit erosion on its way to your financial statement.
When I designed the newest DMS, DealerStar, I created a tool that reconciles these operational reports to accounting, called Profit Wizard and developed a spreadsheet for users on other DMS systems. Send me an email to get a free copy of the spreadsheet.
The second step is to close the gap between operational and financial accounting. This is the most modern thing you can do; improve the integration between the operational departments and the financial accounting department. A highly integrated DMS helps you close the gap. For example, if a service advisor closes a used car internal repair order this morning, does that cost show immediately in your sales, desking, F&I and CRM systems? If a part is received this afternoon in your parts department, how do the technician, advisor and customer get notified? There are hundreds of integration points in a modern integrated DMS. As Warren said, you can fundamentally change your ability to make more profit if you utilize modern accounting techniques; and this means changing to profit accounting. Please send me an email to get the free spreadsheet.
Author: Sandi Jerome
Sandi Jerome is the owner of Sandi Jerome Computer Consulting. Sandi founded DealerStar, a web-based DMS. She is a former CFO, System Administrator, Fixed Operations Manager, and Controller with over 30 years experience in the auto industry.