AUTO FOCUS. The center of everything Negotiating your next DMS contract. Take a hard look before adding a financial executive

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1 AUTO FOCUS Winter 2016 The center of everything Negotiating your next DMS contract Take a hard look before adding a financial executive Key performance indicators Which ones should you measure and monitor? Why you need to formalize your retirement plan policy Financial Plaza, 221 S. Warren St. Syracuse, New York Phone Fax kjacob@dmcpas.com

2 The center of everything Negotiating your next DMS contract At the core of your operations lies its dealership management system (DMS). It controls, measures and reports all business functions everything from inventory management and accounting to sales, parts and service, and F&I. A DMS also represents both a significant IT expense and a long-term commitment for your dealership, because contracts can last several years. So, to manage these expenses, you should be diligent when choosing your system and renewing your contract. Identify your needs Perhaps the most important factor in controlling DMS costs is picking a system that offers the features and functionality your dealership needs without a lot of unnecessary, expensive bells and whistles. Sit down with your department managers to discuss this and decide which features are must-haves, and which ones are nice-to-haves or even don t-really-needs. The question to ask in each case is, Will this feature make our dealership more efficient while cutting costs and fostering increased sales? Take customer relationship management (CRM) software, for instance. CRM, which can be provided as part of the DMS, can help you keep track of all your dealership s interactions with customers. This includes: n Logging which vehicles they looked at and test-drove, n Noting whether they came back for second and third visits, and n Specifying whether or not they ultimately bought a car. Such information can benefit your store in several ways. For starters, you can use it to improve training for salespeople who aren t closing a high enough percentage of prospects. It also can help you target promotional offers to prospects more likely to buy certain types of vehicles. Ultimately, you must identify your needs and align them with acceptable costs. How much you end up spending for your DMS will depend largely on how effectively you negotiate. Drive a hard bargain Here are a few strategies for negotiating the best deal with a DMS vendor: 2 Don t wait until the last minute to start researching your options. If you re facing a hard deadline for choosing and implementing a system, you lose most

3 (if not all) of your leverage. Start your DMS research and investigative process at least one year before your system needs to be installed and operational. Be prepared to switch vendors to get a better deal. Often, dealerships don t want to deal with the hassle of switching to a new DMS and most vendors know this. To gain negotiating leverage, convince your vendor that you re seriously considering other alternatives and will switch if you don t receive the absolute best deal they can offer. Review the contract terms carefully and make sure you understand them. Take the time to read the fine print in the DMS contract. The terminology and language can sometimes be confusing if you have any questions, don t hesitate to ask the vendor for clarification or even consult an attorney. Negotiate based on the total implementation cost. The software is just part of the overall DMS package. Other components include database configuration, hardware, maintenance, employee training and ongoing support. Before starting negotiations with the vendor, make sure the bottom-line price includes everything you ll need to implement and use the system. Unfortunately, many dealership owners don t know what they don t know, says Mark Rogers, dealership management consultant with the National Automobile Dealers Association. And that puts them at a significant disadvantage when negotiating contracts with DMS vendors. DMS training and support are key To get the most out of your dealership management system (DMS) and maximize the return on your investment your employees need to know how to fully and properly use the system. DMS vendors offer varying levels of employee training and ongoing technical support. In general, training is not included in the price for the DMS software itself. Instead, it s usually listed as a separate item in the DMS contract. Training costs vary widely based on factors such as: n The level of training provided, n How the training is delivered (for example, onsite or virtual), n The number of hours of training required, n How many trainers are used, and n Travel and lodging expenses for the trainers (if training is conducted onsite). All DMS training isn t created equal. Ask for the resumés and bios of a vendor s trainers and consultants to gauge their experience. More seasoned contacts may be more expensive, but the extra money could be worthwhile if it results in a smoother implementation and more efficient ongoing operation of the system. Also speak with other dealers on the DMS you re researching. Their opinion on the system, the training and the postpurchase support could prove invaluable. Run the table Don t leave your dealership stuck behind the eight ball when it comes to keeping your DMS up to date. Play the game carefully to control expenses as much as possible. But also work closely with your financial and IT advisors to ensure you re the one running the table. n 3

4 Take a hard look before adding a financial executive 4 Do you think your dealership is large enough for and can afford hiring an executive to direct your financial operations? Before contacting your industry connections for candidate suggestions or lining up a headhunter, carefully consider what goes into making this move. Size matters Dealerships usually need to reach a minimum size before it s financially feasible for them to hire a financial exec. Generally, two thresholds exist: 1) If your business has revenues of around $75 million, or you operate multiple smaller stores, you may be ready to hire a controller, and 2) if you have revenues of around $300 million and run multiple locations, it may be time to hire a CFO. If your dealership has already met one of these thresholds, or soon will, hiring a financial executive can have significant benefits. Perhaps the biggest is the ability of this kind of professional to bring a higher level of strategic and analytical skills to the financial management of your dealership; those skills go far beyond basic number-crunching. The strategic direction that a CFO or controller can bring to the game includes looking beyond day-to-day financial management to more holistic, big-picture planning of financial and operational goals. This individual will take a seat at the executive table and serve as the owner s go-to person for all matters related to dealership finances and operations. Interpreting data A CFO or controller will be able to go beyond merely compiling financial data to providing an interpretation of the data that shows how financial decisions will impact all areas of the dealership. And he or she can plan capital acquisition strategies so your dealership has access to financing as needed to meet working capital and operating expenses. In addition, a CFO or controller will serve as the primary liaison between your dealership and its bank to ensure your financial statements meet the bank s requirements, and help negotiate any loans. Analyzing possible merger, acquisition and other expansion opportunities also falls within a CFO s or controller s purview. Other benefits A CFO or controller typically has a set of core responsibilities that link to the financial oversight of your operation. That includes making sure there are adequate internal controls to help safeguard the dealership from internal fraud and embezzlement. This individual also should be able to: n Implement improved cash management practices that will boost the dealership s cash flow and improve budgeting and cash forecasting, n Perform ratio analysis and compare the dealership s financial performance to benchmarks established by similar-size dealerships in the same geographic area, and n Analyze the tax and cash flow implications of different capital acquisition strategies for example, leasing vs. buying equipment and real estate. If you have multiple franchise locations, a CFO or controller can analyze and compare the different operations from a financial perspective, and look for ways that your business can benefit from economies of scale.

5 first make sure your dealership has the financial resources to support this level of compensation. Bringing in a financial executive also will require a time commitment by the ownership and the existing management team. They ll have to bring the CFO or controller up to speed on all aspects of the dealership s finances and operations. If this training doesn t go well, or the new exec isn t granted enough decision-making authority afterward, this person could become bored and leave your employ wasting your efforts and disrupting the business. Time and money Hiring a full-time CFO or controller represents a major commitment in both money and time. This executive likely will command a six-figure salary and an attractive benefits package, so Weighing the alternatives Hiring a CFO or controller may be the right decision if your dealership is large enough and has the cash flow to support the requisite compensation. However, if you re reluctant to take this step but still seek improved financial oversight your CPA, together with your existing financial staff, can supervise the outsourcing of these higher-level responsibilities. n Key performance indicators Which ones should you measure and monitor? If asked whether they want to improve their dealership s financial performance, most owners would enthusiastically answer, Yes! After all, better financial performance typically leads to higher profits and more opportunities for everyone in the dealership. The first step in any performance improvement initiative is determining how you re doing right now in the areas most critical to your store s financial success. Doing so will enable you to establish benchmarks against which you can compare future key performance indicators (KPIs) across your dealership. What are KPIs? KPIs are quantifiable measurements of your dealership s financial performance that can be used to gauge progress toward goals. Using KPIs enables your dealership to engage in the practice of dashboarding that is, selecting a handful of KPIs that you ll continually measure and monitor against your benchmarks. 5

6 Your dashboard should include KPIs for the overall dealership as well as those broken out for sales, F&I, parts and service. Some typical dealership KPIs, along with sample industry benchmarks, include: n Total gross per employee per month ($7,500 $9,500), n Total advertising cost as a percentage of gross sales (8% to 10%), n F&I gross per vehicle sold (more than $850), n Total service labor sales per repair order (greater than $125), n Parts department gross as a percentage of dealership sales (more than 35%), n Used to new vehicle sales ratio (more than 0.7), n Days supply of new vehicle inventory (less than 60 days), and n Service and maintenance contract penetration (more than 65%). There are literally dozens of different dealership KPIs, so no two dealership dashboards will look identical. Each dealer needs to determine which KPIs are the most important to his or her success. Targeting crucial areas So how do you decide which KPIs to focus on? Start by bringing together your managers and asking them to identify the most important success factors in their respective departments. For instance: Parts and service. Keys to success in this department might be improved absorption, reduced parts aging and increased dollars per repair order. Once you and your managers have identified the critical success factors for each area of your dealership, and your dealership in general, it ll be easier to choose the KPIs that can best help you gauge your progress. Compare KPIs to benchmarks Remember that KPIs have limited value if they re viewed in isolation. Suppose, for example, that your monthly gross profit per employee (another common dealership KPI) is $6,000. Is this good or bad? You have no way of knowing unless you compare it to benchmarks either prior performance periods (such as the same month last year) or industry standards. You can obtain common industry benchmarks from the National Automobile Dealers Association, an automotive dealership 20 group, or state or local dealer associations. Also check with your CPA he or she also may be able to provide numbers you can use for benchmarking purposes. Get started now Take the time now to choose several KPIs you believe are critical to your dealership s success and then begin to benchmark them. This is the best way to see how your financial performance is improving or declining over time. n New and used car sales. In sales, components of success might be keeping enough of the right kinds of vehicles in stock, monitoring proper vehicle inventory aging, maintaining a high salesperson retention rate, ensuring adequate advertising exposure, reaching a market share or improving customer satisfaction scores. 6 F&I. Success factors here might include educating customers about the benefits of F&I products and maximizing the percentage of vehicle sales in which these products are sold.

7 Why you need to formalize your retirement plan policy If your dealership offers a retirement plan to employees, you have certain fiduciary responsibilities as the plan s sponsor. Failure to meet these responsibilities can be costly, because corporate officers (as fiduciaries) may be held personally liable to restore losses suffered by plan participants. The Employee Retirement Income Security Act (ERISA) sets the standards for the fiduciary conduct of plan sponsors. One of ERISA s main fiduciary standards is that plan sponsors have a specific policy in mind when they choose the plan s investments. And one of the best ways for a dealership to demonstrate this is by creating a formal investment policy statement for its retirement plan. What s included? The Department of Labor defines an investment policy statement as a written statement that provides the fiduciaries that are responsible for plan investments with guidelines or general instructions concerning various types or categories of investment management decisions. The language usually addresses topics such as: n The plan s investment structure, n The criteria and procedures for selecting, monitoring and replacing plan investments, n Core and noncore funds offered by the plan (including lifestyle or asset allocation funds), n Whether employer stock will be offered via the plan, and n Ancillary services offered to participants, such as investment education and advice. Although ERISA doesn t require you to draft a formal investment policy statement, doing so can help you meet the law s expectation of procedural prudence regarding plan management. This means that fiduciaries will set and follow procedures designed to make sure the plan is being operated prudently, and that the participants interests are given top priority. Anything else? You might consider creating a retirement plan educational policy statement, too. This document separate from the investment policy statement can help demonstrate procedural prudence and improve your employees retirement outcomes. It should describe how employee retirement education programs will be implemented and run. Both the investment and educational policy statements should define their broad purposes and how fiduciaries should use them. The investment policy statement also should detail the plan s objectives, the duties and responsibilities of plan fiduciaries, and the sponsor s philosophy about different asset categories. In addition, it should describe how investment performance will be reviewed against goals and benchmarks, and how the statement will be reviewed and changed in the future. Who can help? Retirement plans now come standard with most jobs these days including positions at dealerships and, as an employer, you may face challenges covering all of the necessary details. Consult your benefits advisor for more guidance on creating investment and educational policy statements. n This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use AFCwi16 7

8 Guiding dealers to greater success for over 25 years When you hire employees or buy equipment for your dealership, you look for high performance and a proven ability to add value to your company. So when you want accountants and business advisors who can show you how to increase your performance, you look for a firm with industry insight, experience and a track record of guiding dealerships to greater success. For over 25 years, Dannible & McKee, LLP has been serving automobile dealerships throughout New York, Pennsylvania and Vermont. Our more than 40 dealer clients include single franchises as well as large multi-franchise operations. Whatever your needs, we have professionals on staff who can provide you with the specialized services required to operate a profitable dealership in today s increasingly complex automobile industry. To keep abreast of issues and developments affecting businesses like yours, our firm is a member of the CPA Auto Dealer Consultants Association (CADCA), a group of leading accounting firms committed to providing financial and consulting services of the highest quality and integrity to dealerships throughout the United States. Our services to the automotive industry include: Audits, reviews and financial planning Corporate and personal tax planning Assistance with bank financing Cash management and LIFO accounting Income tax planning for entities and owners Internal compliance self audits on demonstrator vehicles, sales tax reporting, warranty contracts and other items Estate tax planning Valuation and ownership transition Buy/sell agreements IRS audit representation Internal control and fraud audits Departmental cost segregation and profit analysis Employee benefits and compensation plans We would welcome the opportunity to partner with you and your business, and assist you in attaining your growth and profitability objectives. Please contact Karl Jacob at or kjacob@dmcpas. com and let us know if you have any questions about the ideas presented in the newsletter or about other aspects of running a successful dealership. We look forward to hearing from you and helping you increase your success. Karl Jacob, CPA, CDA, is a tax partner who focuses his practice on the automotive industry. He has more than 15 years experience in helping individuals, privately held companies and corporations with tax and estate planning, financial planning and tax return preparation. Karl is a graduate of Robert Morris College and a Member of the American Institute of Certified Public Accountants, the New York State Society of Certified Public Accountants (including its Employee Benefits Committee) and the CPA Auto Dealer Consultants Association. Financial Plaza, 221 S. Warren St. Syracuse, New York