Does the car showroom?
Typically, the financial statement divides expenses into fixed and variable. Fixed costs are those required to open the doors- mortgage, utilities, insurance, professional services, real estate taxes, etc. Those costs are fixed in the sense that they stay the same regardless of how much or how little business the dealer does each month. Traditionally, it was a good rule of thumb to see that the profits from the back end, which is service and parts covered your fixed expenses. Variable expenses are just that, they vary. These include commissions, advertising, inventory expenses like interest on new cars, ( another operating rule of thumb was to own your used cars as opposed to floor planning or financing them with a bank line of credit ) and any other expenses associated with selling vehicles. Variable expenses change every month. There are guidelines and, of course goals. So, you might plan to earn 1050 PNVR ( per new vehicle retailed ) after all expenses. Its up to the General Manager to keep his eyes on the numbers and manage his team accordingly. So, example ( simplified ). I buy a car from BMW for 50000. It retails for 60000 ( dreaming!). I spend 400 per car on advertising. 600 per car on interest. 500 per car on miscellaneous variable expenses. My management salaries and commissions expensed to new cars average 800 per car, and maintaining the lot ( washing cars, gassing them, lot boy salary, etc) cost 200 per car. Salesmens salary and commissions average 1000 per car. ( Remember that social security, workers comp, health insurance, etc. are included in salary numbers) In this example, the car the dealer paid 50000 for, that had a potential profit of 10000, cost him 3500 dollars to sell. If he discounts the car anything over 6500, he loses money. If he sells it for a 5000 dollar discount hes ahead of his goal by 450 ( 1500 - 1050 = 450 ). Thats why a dealer needs management who understand the numbers. The manufacturers usually- maybe universally- provide documents that show you the district, regional, and even national averages for all the numbers. Often called a composite it shows you how you stand against the averages in all the categories. When I was a factory rep, we would use this to counsel dealers and managers on performance goals. So if the St. Louis dealers averaged 1225 PNVR, but the Kansas City dealers averaged 925 PNVR, we could identify either an opportunity for KC to make more money per car, or for St. Louis to sell more volume- yes its complicated. Now, its far more complicated than that. Interest varies, of course. And we havent discussed the complicated reimbursements from the manufacturer, nor the whole idea of the finance departments contribution ( sometimes we would sell a car at a loss knowing our F&I was strong enough to make the deal profitable. Parts, service, sales, finance, maybe a body shop- its a very rewarding, but complex business. For the dealership owner, its the highest paid profession in the country- unless he goes broke. In my experience, the majority of the dealers are honest businessmen and pillars of their communities. Like everything else, its the rotten apples who get the attention. I would say though, that the quality of dealership personnel has declined. There just isnt the money in it there used to be and the job conditions are difficult.