Managing fixed and variable expenses can make the difference between running a profitable operation
Dealership success is a fickle game. Many factors can work against you, or for you, on your way to greatness.
New tariffs, OEM programs, customer and employee expectations: your cost structure can change from one day to the next. While it’s important to be fluid in your business model, expense control is really key to driving your business forward. Know your costs — how they behave and what drives them!
Expenses can be broken out into two different categories: Direct Expenses and Indirect Expenses. Both will affect your bottom line, but their impact will differ greatly. Let’s take a closer look.
Variable Expenses
These expenses change in direct proportion to the number of cars you sell or service.
Typical examples of these include salesperson commission and delivery expenses. Referring to Figure 1, you can see that any incremental increase in sales will result in an equal incremental increase in variable costs.
In other words, the more cars I sell, the more commissions I pay. That makes sense! The spread between sales and variable expense will always remain the same and therefore your gross profit, in general, remains consistent.
On a per unit basis, variable costs are consent regardless of how much you sell. If I pay $20 in commissions on every $100 I sell, my variable cost per unit will always be $20. You can’t really change it. It’s just a function of how you run your dealership. You must accept it and figure out how to maximize your revenue model around it.
Fixed Expenses
In contrast, fixed expenses will remain the same regardless of the number of vehicles delivered. They are predictable, recurring and need to get paid regardless of whether you sell anything or not. Typical examples of this in the dealership space include rent, insurance and utilities.
On a per unit basis, fixed costs decrease the more you sell. If my dealership’s rent factor is $100,000 per month and I sell 1 car, then my fixed cost per unit is $100,000. If I sell 200 cars this month, then my fixed cost per unit will decrease to $500. That’s a big difference, right?
Fully understanding the above behaviours is more important than ever. The automotive environment is changing every day and the industry’s optimism swings with every new political announcement.
You must be able to control your costs to survive the storm. Understand the cause-and-effect relationships. What can you control? What must you control?
Proper financial analysis can help in this regard so beef up your efforts here these days. It will help more than you think.
