“When you get up to 4.5:1, there is a switch that flips in your head,” Spader said. “You switch from being a business manager to a cash flow manager.” Business managers, for example, can invest in opportunities and plan long term; cash flow managers live day by day and are just trying to make payroll.
Some other important numbers. While defining a “high-performance dealership,” Spader shared several other statistics related to his company’s collection of dealer data. High-performing dealers are taking home a net profit of 6 percent to 7-plus percent of total sales (after paying themselves wages and rent), he said, noting that the government will take about half of that. Two-thirds of dealers, however, are taking home 3 percent or less.
But Spader prefers to track net profit as a percentage of gross profit (i.e., available income). Using this statistic instead, dealers in the top 20 percent take home 25 percent to 28-plus percent, average dealers 13 percent to 18 percent, and bottom-20-percent dealers 4 percent to 8 percent. What’s so great about these percentages, Spader said, is that they reveal the dealers’ “fudge factor” — the percentage of sales volume they could lose and still break even.
Spader said dealers should track expenses also as a percentage of gross profits. This method, he claimed, beats the traditional accounting method of measuring expenses as a percentage of sales because it’s less susceptible to arbitrary changes in volume. He then gave the following Green (good), Yellow (caution) and Red (problem) percentages for six expense categories:
- Total Compensation — 33 percent, 37 percent, 41 percent
- Other Personnel Expenses (like health insurance) — 6 percent, 7 percent , 8 percent
- Advertising — 3 percent, 5 percent, 7 percent
- Interest — 4 percent, 6 percent, 8 percent
- Other Variable Expenses — 10 percent, 14 percent, 18 percent
- Fixed Expenses — 12 percent, 15 percent, 18 percent
- Total Expenses — 68 percent, 84 percent, 100 percent
“The absolute maximum that we recommend that you spend is 84 cents of every gross profit dollar,” Spader said. “That will convert for most dealerships to a net profit of 3 to 4 percent of sales.”
He added: “Anytime your personnel cost goes over 50 percent of your gross profit, you’re in trouble. High-performers are spending 43 percent. And you know what’s interesting? The high-performers will spend fewer dollars to generate the same amount of sales volume, having the lowest ratio but the highest-paid people because they’ve got fewer people generating those dollars. And most of these dealers have got higher market shares and CSI scores.”