Are You Listening to Your P&L?
How to Use This Statement to Uncover Hidden Opportunities
This MTD exclusive was provided by industry veteran Jeff Morgan, the executive director of TEN (Training and Education Network), including the DSP (Dealer Strategic Planning) 20 Group.
With today’s point-of-sale systems and analytic tools, you have access to reports on just about every part of your business. These reports can let you drill down into any aspect of your dealership that you want to explore or understand. These reports also can be extremely valuable in helping you make improvements and identify opportunities.
However, don’t allow yourself to get mired down in “analysis paralysis” - spending way too much time looking into issues as opposed to doing something about them.
To avoid this, the most important report to focus on is your P&L statement. But just looking at your P&L regularly is not enough. You have to learn to speak its “language.”
You see, any report that you can access, including your P&L statement, is just ink on paper if you don’t understand what it means.
But if you learn to speak its language, your P&L statement can tell you anything you want to know about your business.
Your P&L statement does not know how to lie. It does not sugar coat anything. It will simply “tell it like it is.”
Once you learn how to listen to your P&L, then you can do something about what it’s telling you. Let me give you some examples of what I mean. I recently met with a dealer who was concerned about his gross profit on the service side - and rightfully so. His service gross profit was significantly too low, particularly for the volume he was doing.
Granted, if most of his service work was made up of big-ticket replacement jobs, like engines or transmissions, I could understand it. However, that was not the case.
Upon looking closer at his P&L statement, we noticed an anomaly in his parts and labor mix. I have always suggested that these should be close to 50/50. However, in this case, his parts volume was significantly higher than his labor volume.
Again, this dealer is not doing much in the way of engine or transmission replacements, so that was not the problem.
The P&L told us that something was going on that we needed to investigate.
We started digging and what we found explained the gross profit problem. There were two major issues and both involved not charging for labor. Some revolved around diagnostics. His counter people were going to cars to pull codes to see if there were multiple issues coming up. They found several issues where an O2 code came up.
Instead of charging for a diagnostic, they were simply installing oxygen sensors on these cars. Not only did they miss out on appropriate diagnostic charges to trace the source of the code, this approach produced a number of comebacks because the sensors did not cure the problem. The other issue was that when selling small light bulbs, the service writers were not charging for installation labor. When asked why, they stated that they sell the bulb for so much over cost that they felt that it covered the labor.
That was not the case. This location was missing out on $10 to $20 in small bulb installations every time. The owner did not know this was happening. However, his P&L told him that something was wrong.
The bigger disappointment is that this had gone on for quite some time before the owner was able to “hear” what his P&L was trying to tell him.
That’s why it’s so important to speak your P&L’s “language.” Do not just look at individual line items. Instead look at items together and look for cause-and-effect. This is where your P&L can tell you a lot!
Here is another example of the P&L pointing out the root cause of a problem. In this case, a dealer’s service gross profit, as a whole, was down - both in volume and margin. His store was very busy and its manager just could not understand what was happening. So we dug a little deeper into his P&L.
Something that stood out was that oil changes were up, as were tire rotations. However, we also noticed that brake and front end work were down.
Ah-ha! There was our problem.
More so than that, the P&L also gave us a clue as to the root cause of the issue. There had been a lot of pressure in the store to increase car count. The location was working hard to get in as many cars as it could.
While that was OK, what wasn’t OK was the fact that technicians started performing fewer inspections and the ones that were being performed were poorly done.
You will find a lot of brake and front end work through a proper inspection. The feeling that this location was busy was correct. But it was busy in the wrong way.
After uncovering this issue, the manager began following inspections much more closely. The result was that the location continued to do more oil changes and rotations, but also began to do so much more because of its renewed focus on inspections. This fixed both volume and gross.
The P&L was telling us the problem all along. We just needed to listen to what it was saying to us.
Here is another example. A dealer was concerned because he noticed that tire gross profit at one of his stores was dropping. He regularly watched his selling prices and he tightly controlled discounting, so what could be driving this?
Again, we turned to the P&L. What we found was that his mix of tires had been changing. He had gradually gone from the majority of his tire sales being in the passenger category to the light truck category.
He had always run margins that were too low in the light truck segment, but it was hidden because of his passenger tire margins.
Taking a closer look at his competition in this segment, we discovered that his light truck tire prices did not have to be so low.
We took this information and adjusted the matrix he used to price his light truck tires. He remained competitive in his market - and now was pulling two to three points more than before. is brought his overall tire margin back to where it had been.
Again, his P&L was telling him what was going on. He just needed to listen more closely to it.
I have always said that if you got rid of all the other reports that you looked at and simply did a better job of listening to your P&L, you could manage your business extremely effectively.
I still believe that. But since you do have all of these other reports, use your P&L to tell you which ones to examine more closely. Otherwise, you will run the risk of getting too wrapped up in reports that are not helping your business improve. This is the “analysis paralysis” that I mentioned earlier.
Your P&L requires you to understand all aspects of it fully. This will allow you to understand how different aspects of the numbers are impacted by others, thus helping to point you in the right direction to find the root cause of what is going on.
As with any language, it takes time to become fluent “in P&L.” It takes dedication and commitment to practice using the language. And you must practice it a lot.
After taking three semesters of German in college, I could speak and understand it fairly well. However, after not using or practicing German for several decades, I’m pretty lost with it now.
The same concept applies to your ability to listen to your P&L.
Take the time to deeply understand every piece of your P&L and how those numbers came to be. Force yourself to take a deep dive into the report every month. Force yourself to look for opportunities based on what you see.
This practice will build the fluency that helps you hear - and understand - what your P&L is saying. Be prepared to listen to what it is telling you!