It’s the end of the year, and you’re likely planning your moves for 2013. Auto dealerships often find setting, monitoring and meeting objectives for the coming year to be difficult tasks. For example, keeping track of what you wrote down as goals in November may seem less important as the new year progresses and you grapple with day-to-day challenges.
Here is some advice for setting — and meeting — your annual business objectives.
Pinpoint strengths and weaknesses
“Where are we weak?” and “Where are we strong?” should be asked at the onset of
the goal-setting process. Areas where you’re weak can be transformed into objectives for the coming year. For instance, let’s say you’re underperforming in the F&I area of your dealership. Perhaps set an objective to hit a higher penetration level or a higher dollar per retail unit sold on F&I products.
Areas where you’re already strong can be expanded. If your F&I metrics are meeting standards, maybe you could enlarge your current service offerings to include tire warranties, emission warranties and so on.
Your objectives should reflect your dealership’s strategic plan, a map of short- and long-term goals. These performance objectives should meet certain “S-M-A-R-T” criteria. That is, they should be:
Specific. Make each objective as precise as you can. Include dates, locations, processes and requirements for completion. For example: “Sell 20% more new vehicles than in 2012 each quarter by increasing our advertising budget by 10% and our sales force by two.”
Measurable. Know the results you wish to achieve and be able to quantify them. Rather than setting a goal to, say, “improve response time for e-mailed sales inquiries,” you could set a goal to “decrease average response time for e-mailed sales inquiries from one day to four hours.”
Attainable. Be sure that your objective is something under your control. For instance, a goal to reduce overhead might be unattainable if your manufacturer requires you to construct a larger facility.
Realistic. Set your goals high enough that they involve a challenge, but not so high that they can’t be reached. For example, if other dealership service departments in your franchise’s region with a similar number of technicians do an average of $10,000 of business per day, you may be setting yourself up for failure if you make your goal $15,000 per day.
Timely. Give your objectives timelines that are reasonable and keep you on track for achieving results. For instance, you could strive to reduce the number of service customer complaints by 50% by year end but, to help keep you on track, plan to send your service writers to a customer satisfaction seminar by the end of the first quarter.
Monitor, monitor, monitor
Once your goals are written, they should stay in the forefront. Ask your top managers to inform you of the processes they’re using to attain their goals and to monitor their success.
Every month or, at minimum, every quarter, they should report the progress they’ve made reaching their goals. Managers also should inform you of any significant obstacles that get in the way of success. Celebrate milestones and learn from setbacks.
A year-round process
No matter when your year ends, you should evaluate how your dealership is meeting its goals throughout the year. Woe be the owner who waits until the end of the year to discuss financial performance with his managers. By then, it’s usually too late to solve problems.
Always have your finger on the pulse of your dealership’s performance. Action plans to reach your annual objectives may need to be retooled as the year goes on.
Determining your own pay
Do you feel that your business is back on track after the recession? If your new car sales have put a smile back on your face and your used car and service departments are merrily humming along, you might think now’s the time to give yourself a hefty and overdue pay increase.
But before you compensate yourself for all you believe you deserve, take stock: The IRS is in the business of scrutinizing top executives’ salaries, bonuses and distributions or dividends. Various stakeholders also may be examining your self-compensation decisions. Here are some factors to consider before setting your new pay.
What’s the right balance?
Let’s start with the basics. Your compensation is affected by the amount of cash in your dealership’s bank account. But just because your financial statements report a profit, it doesn’t necessarily mean you’ll have cash available to pay owner-employees a higher salary or large bonus or make annual distributions. Net income and cash flows aren’t synonymous.
Other business objectives — such as buying new equipment, repaying debt and sprucing up your showroom — vie for your kitty. So, it’s a balancing act between owner-employees’ compensation on the one hand and capital expenditures, expansion plans and financing goals on the other.
Here comes the judge!
If you or your dealership is involved in a lawsuit, the courts might impute reasonable (or replacement) compensation expense. This is common in divorces and minority shareholder disputes. The amount the court prescribes for your compensation affects business value, which, in turn, affects damages awards and asset distributions. In divorce, reasonable compensation also affects child support and alimony awards.
When a court imputes reasonable compensation, it typically considers compensation studies and other factors — including your salary history, responsibilities, experience, geographic location and dealership’s performance.
What if you’re a C corporation?
If you operate as a C corporation, your deal- ership’s income is taxed twice. First, it’s taxed at the corporate level. Then it’s taxed again at the personal level as you draw dividends — an obvious disadvantage to those owning this corporation type.
C corporation owner-employees might be tempted to classify all the money they take out as salaries and bonuses, which the company can deduct, to avoid the double tax on dividends. But the IRS is wise to this strategy: It’s on the lookout for excessive compensation to owner-employees and may reclassify above-market compensation as dividends, potentially resulting in additional income tax as well as interest and penalties.
The IRS also monitors a C corporation’s accumulated earnings. Generally similar to retained earnings on your balance sheet, accumulated earnings measure the buildup of undistributed earnings. If these earnings get too high and can’t be justified for such things as a planned expansion, the IRS may assess a tax on them.
What about S corporations?
S corporations, limited liability companies and partnerships are examples of flow-through entities, which aren’t taxed at the entity level. Instead, income flows through to the owners’ personal tax returns, where it’s taxed at the individual level.
Dividends (typically called “distributions” for flow-through entities) are tax-free to the extent that an owner has tax basis in the business. Simply put, basis is a function of capital contributions, net income and owners’ distributions. Distributions in excess of basis are subject to ordinary income tax, but they’re not subject to payroll taxes.
So, the IRS has the opposite concern with flow-through entities: Agents are watchful of owner-employees who underpay themselves to minimize payroll taxes. If the IRS thinks you’re downplaying salary in favor of payroll tax-free distributions, it may reclassify some of your distributions as salary. In turn, while your income taxes won’t change, you’ll owe more in payroll taxes — plus interest and penalties, potentially.
Do you reflect the market?
Above- or below-market compensation raises a red flag to the IRS, and that’s definitely undesirable. Not only will the agency evaluate your compensation expense — possibly imposing extra taxes, penalties and interest — but a zealous IRS agent might turn up other challenges to your records.
What’s more, it might cause a domino effect, drawing attention in the states where you do business. Many state and local governments face budget shortages and are hot on the trail of the owner-employee compensation issue.
Who else might be concerned?
Other parties may have a vested interest in how much you’re getting paid, too. Lenders, franchisors and minority shareholders might think you’re impairing future growth by paying yourself too much.
If a silent owner, factory representative or lender, for instance, decides your showroom looks shabby and sees flat sales, your salary expense and dividends might become the subject of debate.
Avoid hot water
One of the major advantages of being a dealership owner is having a big say in all manner of decisions. But when it comes to your compensation, make sure you’re being prudent. Otherwise, you may find yourself in hot water with the IRS and others who have an interest in your business.
Should you expand your store’s hours?
Marty saw an opportunity: Three of his competitors had closed their doors, and he knew their customers would be shopping for a new place to get their vehicles serviced. Marty took action: He hired several more service technicians and changed his hours of operation.
Marty expanded service hours from 8 a.m. to 5 p.m. Monday through Friday to 6 a.m. to
8 p.m. on those days. As part of his business plan, Marty also allocated more money from his budget (about $7,000 a month) to radio and, for the first time, TV advertising.
So how did Marty do? In short, his service business took off with a vengeance. Many of the new customers — as well as some of his existing customers — seized the chance to bring in their vehicles before and after work. After one year, John’s service department revenue jumped from $100,000 a month to nearly $145,000.
Customers crave convenience
If your dealership hasn’t expanded into evening hours, consider the concept. You may be missing out on a profitable opportunity and not setting yourself above your competition. And if you don’t already offer weekend hours, look into that, too, simply to keep up with your rivals.
The biggest rise in expanded service hours came during the recession, says Paul Taylor, chief economist for the National Automobile Dealers Association (NADA). Dealers needed to rely more heavily on service and parts sales for revenue than new car sales. The climb has been fairly steady since, according to NADA statistics.
As of year end 2011, 74% of dealerships offered their customers the chance to get their cars serviced during the weekend, according to NADA DATA 2012. And 28% offered both weekend and evening hours. Only 22% of dealers stuck to a daytime, Monday through Friday schedule.
Costs must be justified
Although expanded service hours fill customers’ need for convenience, dealership owners shouldn’t automatically think that additional service hours equate to additional revenue. “You could be open 24/7 but that’s likely to be prohibitively expensive,” said Taylor. “There probably would be hours when your service bays would be empty. Your costs wouldn’t be justified.”
Do your homework before jumping on the expanded-service-hours bandwagon. A good place to start is asking your customers whether they would service their vehicles outside your current hours. Are the positive responses high enough to justify your additional costs: utilities, salaries and wages, including possibly higher compensation for those working extended hours?
Your CPA also can be of assistance. He or she can analyze the financial side of the equation to determine the volume of sales needed to cover the extra costs incurred, including the number of additional employees needed to cover the increased hours. Or you might want assistance in developing a plan to restructure current staffing levels to allow for the expanded operating hours.
Being more competitive
Expanding service department hours might be a profitable move for your business. With more older vehicles on the road than ever before and used car sales steady, expanded service hours may be one smart way to expand your business without adding floor space, or buying or building another store. Additionally, expanded service hours may be necessary to compete with quick-lube stores and independent garages, which typically are open in the evening.
Solid growth forecast for 2013
U.S. light-vehicle sales are expected to climb from about 14.5 million units this year to approximately 15 million units in 2013, accord- ing to participants in the Chicago Federal Reserve Bank’s Annual Automotive Outlook Symposium.
At the 2011 symposium, participants forecast that 13.2 million light vehicles would be sold that year. A total of 12.7 million units were actually sold.
Watch your “up to” claims
The results of a recently released Federal Trade Commission (FTC) study show that, when companies make “up to” claims about savings to consumers, many consumers are likely to expect the full “up to” results.
The study was held in tandem with an investigation of five companies that were found to have made unsupported claims about the cost benefits of their replacement windows. A test group of consumers was asked what they believed when they read a window manufacturer’s claim that its replacement windows would save the homeowners “up to 47%” in energy costs.
The FTC recently said it thinks the study’s results “will help guide advertisers to avoid the use of misleading ‘up to’ claims” and reinforce the agency’s view that advertisers using these claims “should be able to substantiate that consumers are likely to achieve the maximum results promised under normal circumstances.”
Auto manufacturers have been the subjects of complaints and even lawsuits in recent years by consumers who disputed their “up to” claims about fuel savings for certain models.
“What part of this sentence don’t you understand?”
Audio, entertainment and navigation systems were the most common complaint areas reported by new vehicle owners in the first 90 days, according to the 2012 U.S. Initial Quality Study by J.D. Power and Associates.
The study found that hands-free devices not recognizing commands has become the most frequently reported problem by new car owners. Moreover, the number of owner-reported problems with factory-installed hands-free communication devices has increased 137% in the past four years.
The uptick in these problems is linked to the rapid increase in owners buying these new technologies as well as a change in the marketplace. “Until recently, this type of sophisticated technology was found primarily on high-end models,” a J.D. Power executive noted. “However, over the past few years it has rapidly found its way into the automotive mainstream. For example, in 2012, more than 80% of owners indicated that their new vehi- cle has some form of hands-free technology.”
Do you have enough service technicians trained to handle new-technology problems? With statistics like these, it’s probably wise to beef up your staff’s expertise.
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This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use. ©2012 DLRnd12