In performing a diagnostic review for this dealership, we recognized “Other Salaries & Wages” expenses per the factory financial statement were out of line with industry standards. As we worked with the dealer to gain more insight into this concern, we discovered that the cause of the higher expenses was primarily the result of employee classifications and overtime.
In an effort to resolve these two issues, we started by working with the client to determine the correct department and account to categorize employees. For example, a clerical expense that was charged to “Other Salaries and Wages” was re-mapped to a separate clerical expense account.
Regarding the overtime reporting, the dealership appeared to be properly staffed, so there shouldn’t have been a need for so much overtime. After further investigation, we were able to determine that with proper management the overtime could be (and was) eliminated.
While this only saved the dealership a few thousand dollars, the final result of the diagnostic was proper categorization of employee salary expense, which gave the dealership the ability to quickly identify excessive salary costs. Additional internal control measures were put in place to assist the managers in helping to identify and control overtime. Performing a Dealership Diagnostic is a powerful starting point to affecting the bottom line.
What We Found: Parts Inventory
As is often the case during the process of the diagnostic check, we discovered more: an unusual adjustment in the parts inventory account. The days’ supply of parts inventory was above industry benchmarks standards.
When our dealership advisors discussed the issue with the owner, he confirmed the parts inventory appeared to be outside the dealership norm. We then recommended a physical inventory count be performed on the entire parts inventory.
As a result, it was discovered that inventory was overstated by $60,000. We then worked with the dealer to institute new procedures that would more accurately monitor the parts department inventory. The dealership also implemented a regular cycle count of parts bins. Furthermore, we recommended they use a third party for the parts physical at least every two to three years and provided vendor options to the dealership.
What We Found: Warranty Labor Rate vs. Customer-Pay Rate
Lastly, in reviewing the factory financial statement, we noted that the reported warranty labor rate was low compared to customer pay rate. The owner was aware of the difference but didn’t have the resources to make the applications necessary to get approval for a higher rate.
Eide Bailly assisted with performing an Effective Labor Rate analysis and submitting the application to the factory. The dealership was successful in obtaining a labor rate increase of nearly ten dollars per hour, resulting in an immediate increase in warranty labor gross profit.
