Budgets and Forecasts

by: Stephan King, Partner, Moss Adams LLP

As mentioned in my last article, Hire Professionals, successful dealers mitigate their weaknesses by hiring professionals. The people they hire are capable of preparing and analyzing financial reports, and they help dealers benchmark and score their performance.

One way of scoring a dealer’s performance is by using budgets and forecasts. Dealers use these tools to hold themselves accountable and predict the future. They also use them as benchmarks when comparing their dealership to others in the industry.

I believe budgets and forecasts are similar to a golf scorecard. The score is measured by the profits as they relate to expenses of the dealership. Viewing your budget or forecast as par, if your expenses are under budget, you’ve made a birdie. If your expenses are over budget, you’ve scored a bogie. Are you over or under par?

Budgets and forecasts are a way of keeping score of the game you are playing, a game where, in essence, you compete with yourself. And who better to compete with? By playing the game to win, you compete with yourself more effectively.

If you want to create and integrate the budgeting process in your dealership, where do you start?

HISTORICAL DATA
Before you know where you are going, you should know where you have been. Start with your dealership’s history. Review your results for the last five years. Does your historical data give you an idea of future performance? Can you easily identify and extract measurement criteria from prior results and your dealer management system (DMS)?

CRITERIA
Next, determine the specific items to measure. There are a number of areas of your dealership to measure. You need to use your DMS to extract the data. The data should be easily accessible and meaningful. Effective budgets and forecasts need to have the “S.M.A.R.T.” characteristics. In other words, they need to be Specific, Measurable, Attainable, Realistic, and Trackable. Setting targets for sales, units, and gross profit are common internal benchmarks used by successful dealers.

The budgeting process also involves generating internal financial statements based on estimates. These may even allow you to determine your break-even point. Breakeven sales are defined as the level of sales required to cover fixed costs, given the dealership’s profit margin. For example, do you know the number of sales on a per unit basis required for you to break even? If you effectively forecast your dealership’s results, you can answer this question with confidence.

So what criteria should you include in your budget? Here are some areas you need to measure:

• Income Statement Budget
Departmental sales should be measured in terms of units, dollars, and percentages, as should departmental gross profit. The specific measures include: operating expenses, flooring cost, all other income (expense), pretax profit, net income, and depreciation and amortization.

• Cash Flow Budget
The cash flow budget represents how cash came in (cash receipts) and went out (cash payments) of a dealership during a period. You have probably heard it before: positive profits do not necessarily make for positive cash flow. This is very true. You pay taxes on profits, but cash flow pays the bills.

Changes in balance sheet items also affect your cash flow. The cash flow budget presents these changes by breaking them down into three sections—operating, investing, and financing, classifying the different accounts by their nature. The results of the three sections together will equal the actual change in cash.

• Inventory Budget
Inventory drives your dealership. Effective inventory management and budgeting can greatly affect profitability and cash flow. Benchmarking inventory turns is essential. Likewise, given the escalating cost of flooring, holding inventory drives down a dealership’s profitability, thus affecting cash.

FREQUENCY
Lastly, determine the frequency of the measurement period. Not all measurement criteria are created equal. Some criteria is more appropriately measured on a weekly basis, while other criteria are more effectively measured monthly or annually. However, you will be limited by the ability of your office staff and your DMS.

Budgets and forecasts vary in scope and complexity. I’ve highlighted a small fraction of the areas you can track in your dealership. Many data management systems allow you to build your budget based on the characteristics of your individual dealership. They may also allow you to track your progress.

However, without a commitment from your management team, the most well thought-out budget will be poorly executed. Budgets should be monitored, finessed, and communicated. Successful dealers use them to predict the future, and to reward results. Do you budget and forecast for your dealership? Do you compare your results against industry benchmarks or those of a 20 Group? Do you reward good results?

Stephan King is a certified public accountant and partner of Moss Adams LLP. Moss Adams serves over 400 dealerships nationwide, providing creative solutions to clients’ complex issues. For more information contact them at (800) 905-4010 or visit their website at www.mossadams.com.