For the last two or three years, few of Withum’s dealership clients looked at their expense structures, Stuart McCallum, leader of the tax advisory firm’s dealership services practice, says. Dealerships were making money hand over fist and didn’t feel the need to conserve money.

Those days are gone, he says. As profits return to a more normal level, dealerships should be paying close attention to their operating expenses. “You all have to be consummate professionals running the store as if they were public companies,” McCallum advises.

Not all dealerships have gotten that message. Withum advises some 1,400 dealerships. About half “are now going back to the fine-toothed comb and asking granular questions,” McCallum says. “The other half are still a little euphoric and looking in the rearview mirror.”

For example, a client had warranty incentive receivables of $50,000 that they likely wouldn’t have followed up on. Now they do, he says.

Areas to keep an eye on

Advertising is one expense dealerships need to be taking a close look at now, McCallum says.

A Withum client’s pre-Covid expenses were around $700 a unit, for example. Then, during Covid the dealership didn’t need to spend anything on advertising to move the metal and was still making money.

In 2022, the dealer “got pretty big for his britches” and started spending around $1,800 per unit in advertising. Meanwhile, his grosses were coming down.

“It wasn’t a pretty picture,” McCallum says.

He also recommends dealerships start paying attention to fixed operations again. The past few years, for some clients, “they were making so much money on the front end, people stopped looking at fixed ops,” McCallum says.

Withum has clients who are picking up middle to high six figures of additional income by making sure manufacturers are paying updated labor rates on reimbursements, he says. “This is more or less just asking the factor for what you are owed” McCallum says.

Some dealerships’ parts matrix – what they charge manufacturers for parts – are also outdated, he says. “A lot of folk’s parts matrix hasn’t changed in twenty or thirty years.”

Withum has “gotten two million dollars in additional gross a year on labor and parts,” McCallum says. “(Dealerships) don’t even have to do anything. They just never hired anyone to look.”

Having a CPA who has been in the auto retail business for longer than a few years is also important, he says. Those who haven’t may not look closely at areas such as inventory turn, which hasn’t been discussed much in recent years because vehicles sold so quickly.

“I was talking to a staff the other day about inventory turn,” he says. “It wasn’t a question that has really been asked the last four years. Now, with 8.5% interest rates and slowing sales you have to ask how long a car is being held for.”

Inventory turn and cash flow

Rather than volume or premium brand, inventory, or the lack thereof, is the main determinant of which franchises should be combing through expenses, McCallum says. Those with high inventory need to start combing.

In April, the average days supply was 76, according to Cox Auto. The lowest days supply was Toyota, at 30. At the high end, was Dodge at 151 days.

At a recent closing, an (unnamed) dealership had 40 or 50 days inventory. “They are still making strong grosses. They don’t need to watch every penny,” McCallum says.

Another client, a Stellantis dealer in Florida, watches every penny and is a good, strong dealer. But he is still having a hard time, McCallum says.

One reason is that “floor plan expenses are through the roof,” he says.

The issue also may be regional, McCallum says. The dealer “is having a hard time getting banks to buy the paper for people (the dealer) thought would be under writeable but aren’t. He can do everything right and that just crushes it.”

In this environment, for any franchise, understanding the cash flow of a dealership is crucial, McCallum says.

“A long time ago, dealers understood cash was king,” he says. “We have a lot of dealers today that don’t understand that you could have $5 million in income, but if it’s not liquid, it can’t help you. So maybe keep that cash on hand and not use it to buy a jet.”