Budgeting strategies for breeding success

By Bob Clements

With 2009 fading fast, it’s time to start putting a pencil to paper and make some educated guesses as to what 2010 will bring and what you hopefully will gain from the time, money and resources you invested into your dealership. In this article, I want to focus your energies on something that most of you have thought about, but likely have not taken the time to do, and that’s budgeting.

Simply stated, a budget is a business plan that you use to guide you through the upcoming season. It represents your estimated sales from service, parts, wholegoods and possibly rental, along with the costs to produce those sales. To make a profit next year, you have to make reasonably accurate estimates of what you expect to sell and what you expect to spend, and do everything in your power to manage both effectively.

When you think of budgeting, don’t think of it as an anchor that doesn’t allow you to move, but rather a tool that you can use to help you achieve your goals. It allows you to use your resources where they’re most needed, so your dealership will head in the right direction.

Creating a budget for your dealership doesn’t have to be complicated or time consuming. In reality, it’s best to keep things simple. The keys are to determine how much you’ll spend and earn in any given year, and then use those numbers to project how you want to grow in the future.

In your business, you simply need to start by looking at your numbers from last year, see where your money went, and then decide if that is where you actually wanted it to go. Keep in mind that a budget is simply a tool that allows you to put your money where it can best be used.

To begin putting a budget together for your dealership, answer the following questions:

How much can you realistically sell next year in service, parts and wholegoods?
What margins will you expect to maintain?
How much will it cost to produce an hour of billable time in your shop?
How much will your parts cost you for both OEM and aftermarket?
How much will your wholegoods cost you, including setup?
How much are your operating expenses for each department?
Do you need to hire employees? If so, how many, and how much will you pay them?
How much will you pay yourself?
How much payroll tax and unemployment tax will you pay?

As you answer these questions, you will begin to form your forecast and your budget for 2010 while determining two critical things — your projected income and your expenses.

When it comes to making your income projections, be conservative in estimating your wholegoods, parts and labor sales for next year. Look at what you sold during the past three years to get a sense of the growth. Use that growth average against your 2009 sales numbers and forecast from there. The key to creating a budget is to be realistic, not optimistic. If you paint too rosy of a picture, you can easily get in over your head and spend money on sales that never happen.

As for your projected expenses, consider advertising, vehicle and property insurance, rent, taxes, phone, utilities, equipment and payroll whether you pay them now or incur them in the future.

Once you see your projected income and expenses on paper, you’ll know exactly how much money you need to make every month to keep things afloat, and how much you’ll have left over for extra expenses. It will be far less tempting to spend money on business expenses that aren’t part of your plan. And that’s really the purpose of a budget — to ensure that your expenses don’t exceed your income, so you can keep your dealership afloat. It’s as simple as that.

Most dealerships have a good business management system in place to keep track of their wholegoods, parts and labor sales — along with an accounting system to handle payroll — yet fail to grasp the importance of exercising good financial control of their dealership and end up struggling. I know that all of you have more than enough going on in your dealership that you are not looking for another thing to occupy your time. However, I will tell you that setting up a good budget and then continuing to evaluate it on a monthly basis is critical to your dealership’s success.


MEETING OF THE MINDS: From right to left, Frank Mobley, owner of Rabalais Small Engines, Inc., reviews year-end sales data with Debbie King, bookkeeper, and Lonnie Salard, general manager.Bookkeeping is not enough

Frank Mobley, owner of Rabalais Small Engines, Inc., a two-store and soon-to-be three-store dealership headquartered in Alexandria, La., understands that bookkeeping is not enough when it comes to knowing the current state of your dealership and projecting its future. Mobley takes the information that his business software produces and uses it to financially control where his dealership is going. He looks at the numbers and then manages to them. He understands where his margins are compared to what he expects them to be, and makes adjustments in his costs if they are not up to his budgeted levels. Mobley practices what I encourage dealers to do — take financial control of your dealership.

When I talk with dealers about budgeting, many think that I am talking about bookkeeping and want me to talk with their accountant. Most of the accountants with whom I work with at dealerships understand how to keep track of the sales and the costs associated with those sales. They know how to keep track of accounts receivables and accounts payables. They understand the difference between an asset and a liability. They can tell you how much you owe for your withholdings and your estimated taxes. But, they have little, if any, knowledge of what you need to financially control your business. Accurate bookkeeping is an important part of gaining financial control over your dealership, but it’s the beginning of knowing what’s going on in your dealership, not the end.

Once you obtain the figures from your bookkeeping system, you can use them as a basis for controlling your dealership’s finances. By staying aware of your financial situation, you can take proactive steps to solve any problems before they become an issue that can’t be easily handled.

It starts with objectives

As a pilot, I would never fly a plane from Kansas City to Dallas without first filing a flight plan. A flight plan serves two primary purposes. First, it goes to the Air Traffic Control System, where it is programmed into a computer that compares my flight plan with all of the other flight plans active at the same time. If the computer recognizes a potential conflict of air space, it recommends a change in the flight plan to avoid the conflict.

The second purpose for filing the plan is to make the tower aware of my presence and my route, so Air Traffic Control will look for me if I don’t show up at the planned arrival time. In essence, I know where I want to go and create a plan on how to get there. Most of you have flown at some time in your life, and the exact same process takes place each time you board a plane.

As a pilot, I start every flight with an objective. I know where I want to go and prepare my plane to get me there. However, I don’t know exactly what the weather will be like along the way or what other traffic I might be directed around by Air Traffic Control.

It’s a lot like your dealership. You don’t know exactly what the weather or the economy will be like, and you don’t know what new dealer your manufacturers may set up to compete against you in your marketplace. Yet, you, like me, have to take off and then make adjustments as the flight or year moves along. In your dealership, you do that by creating a budget and sales objectives for each of your profit centers.


There is an old saying in the computer world, “GI – GO,” which means “garbage in – garbage out.” Your business software is only going to be as accurate as the information that you and your employees input. A reliable, easy-to-use, business management system is essential for effective financial control in your dealership.

It’s critical that you keep good information on your labor sales to customers — for warranty claims and for internal work. You also need to track any discounts that you give for work that you were unable to charge to the customer.

When it comes to parts, you want to track parts sales for customers at the counter, the Internet, the service department, accessories sold through wholegoods and warranty.

In wholegoods, you will want to know your sales and costs by line, making sure that you include any setup costs associated with the equipment. If you are doing rental, make sure you are keeping track of not only the rental income, but also all the parts and labor that is involved in keeping the equipment in rental condition.

Analyze the numbers

One of the most important things to know is your liquidity — how much cash do you have immediately available. To make that determination, you have to make sure that you bring the account balance up to date and conduct bank account reconciliation every month.

At the end of the month, have your bookkeeper prepare an operating statement, showing income from your various profit centers, the direct costs and the overhead costs. Like your profit-and-loss statement, the operating statement records income and expenditure, but does not show some items such as depreciation and bad debts. At the end of each month, Frank Mobley looks at his numbers and compares the actual performance of his service, parts and wholegoods departments to his forecast. Then, he makes any necessary adjustments to improve the profitability of his stores.

If you are like me, it’s difficult to keep a complete picture of what’s happening in the business in your head, so I use a few simple ratios and graphs that show me what’s going on and allow me to quickly take action if needed. As an OPE dealer, you are going to want to look at each profit center and understand the ratios that are critical to monitoring your budget.

 The first thing you want to look at is a ratio analysis for each of your profit centers; you can get this information by calculating your costs as a percentage of sales. If your costs are increasing as a percentage of your sales, then you need to determine why and start giving some thought about how to solve the problem. It might be something as simple as reducing overtime. During slow season, there should be no overtime at all and only a small amount of overtime allowed during normal season. If you are going to be open on Saturday for a half day, require your employees to take off a half day during the week to offset the time.

Second, measure your gross profit margins. When you set up your budget, you have a baseline for where your margins are in 2009. As you monitor your budget each month, your goal is to grow those margins. If your margins are dropping below your 2009 numbers, it is most likely a sign of trouble ahead. Start evaluating costs, make changes immediately, and monitor them closely the following month.

Third, evaluate the difference between what you budgeted and the actual numbers you produced. Make sure you understand why the figures are changing for either the good or the bad.

Don’t give up

The key to budgeting is to re-evaluate it every month. If you set a budget and then don’t look at it until the end of the year, you can’t make the necessary changes to allow the budget to make a positive impact on your business. Look at how your revenue matched up. Look at where you went over and under your planned expenses. If your sales were lower than your expenses, try to find some ways to cut costs.

Again, remember that a budget is not created to be an anchor, but instead to be a tool for you to use to grow your business. It should help you avoid unnecessary spending, but if something comes up that would be valuable to your business, don’t ignore it simply because it isn’t in your budget. Those are times you need to “bust” your budget to take advantage of opportunities that will benefit you in the future.

If you would like some help on getting started with your budgeting process, e-mail me at bob@bobclements.com and I will send you a template that we use with dealers to help get them started.

By investing a few hours now to do a budget for 2010, you will seize financial control of your dealership, improve your profitability, and become highly successful!

 Bob Clements is the president of Bob Clements International, Inc., a consulting firm that specializes in the development of high-performance dealerships. His organization works hands on with dealerships throughout North America, helping them attain the personal freedom and financial wealth all owners strive to achieve. For more information, contact Bob Clements at (800) 480-0737 or bob@bobclements.com or visit his Web site at www.bobclements.com.

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