Is Your Dealership Run as a Charity, a Non-Profit or For-Profit?
Make Your Choice As You Gear Up for 2023
This MTD exclusive was provided by Dennis McCarron, author of MTD's monthly Business Insights column and a partner at Cardinal Brokers, one of the leading brokers in the tire and automotive industry (www.cardinalbrokers.com).
I want you to go outside and see if there is a giant red cross on a sign pole outside your building. Go ahead and check just to make sure. Now check your most recent income statement. Go to the net profit line and see if there’s a negative sign, because if there’s a red plus sign outside, there will be a minus sign on the bottom of your income statement.
As a successful tire dealer, you should be helping charities - not be a charity.
Sometimes a down-on-his-luck customer may need a kind soul to take pity on him and help him out. There’s a time and a place for that.
Hopefully, you may have a process for this, either working with a real charity or having a selection process that can pick a deserving recipient.
However, if your charity is being run at the counter and every complaint about tough times is met with a discount, it won’t take much to mutilate the bottom line of your dealership.
It is possible to be empathetic to customers and maintain profitability. After all, you’re here to take care of the entire community - not risk closing your doors over a handful of local residents who are looking for a less expensive repair.
Make sure your employees know to not sell with their own wallet. They should present options for customers - not discounts.
Is your dealership run like a non-profit? In a scenario like this, employees look for “donations” from customers just to cover expenses. If you’re operating as a non-profit, I can guarantee you that your profit margins on parts and tires - along with your labor rate - aren’t in line with today’s metrics to run a business.
In order for a tire store to turn a profit, it needs to have proper margins and it also needs to recommend additional, legitimate services to customers. A dealership will not be profitable if it only does the minimum requested work.
The things customers ask for are usually the least profitable items you sell.
Customers rely on professionals to bring complete pictures of their vehicle’s health and present an honest assessment so they can decide what they will do now, what they will do later and what they won’t do.
It’s OK if a customer says no. It’s not OK to avoid letting them know.
Hopefully, you’re running your business as a for-profit company because that’s what it is. That means making sure you charge the right price, you sell the right parts, you back your warranty, you pay your employees well - more on that later - and at the end of the month, you have about 10% of your sales in profit so that you can fund your cash flow easily.
Net profit doesn’t go in the owner’s back pocket. It funds tire purchases, pays your taxes, makes repairs and upgrades to your facilities possible and helps make sure that when it comes time to sell your business, there’s a cushion for all the new taxes you’re going to have to pay.
Good employees also should be rewarded. Employees who regularly show up to work on time, hit their goals, actively seek out educational opportunities and create bonds with customers and employees alike should be treated like royalty.
But there is a limit. Professional service advisors should consume about 7% or less of gross profit. In a store with $1.5 million in sales and a gross profit of $900,000, that should equate to about $60,000 in total compensation - not including payroll taxes.
This is achieved by selling equal amounts of tires, parts and labor. If a store is light on service - or heavy on tire sales, depending on how you look at it - this number will skew downward as tires are less profitable than service.
A tire dealership’s biggest ongoing struggle is typically controlling payroll. Total payroll should be kept under 50% of gross profit at all times. Any higher and the store is just spinning its wheels as a charity or a non-profit. It doesn’t take a lot of overtime or just pushing cars through with only requested services to reduce your business’ net profit to nothing.
So it’s time to make a choice as you gear up for 2023. Do you want to be a charity, a non-profit or a for-profit business? If you want to make a profit in this business, start with charging the right prices, employ professional sales advisors who present legitimate findings, back your warranties, control your payroll and keep the place looking clean. That’s a good start to a new year.