Most of you are probably adding the final touches to your 2012 business plan. At NCMi, we refer to this annual planning process as budgeting. Many experts agree that automotive dealership budgeting is as much an art as a science. Because industry business cycles are not repetitious, a good budget may result as much from experience, sound instincts, and good judgment as from anything else. Nevertheless, a budget is pretty much a view into the crystal ball, attempting to predict the long-term outcome of our dealership success. Accumulating a series of short-term successes will result in long-term success. Therefore, we need to focus heavily on the immediate future (the next 90-days, next month, or even next week) in order to maximize our long-term success. In the following discussion, we’ll refer to this process as forecasting.  

Automotive retail industry forecasting uses historical data to try to predict future events. This data might include the same period last year, or the most recent 90-days, or last month, or a combination of all three periods. In any event, the forecasting process must begin with documenting and understanding where we’ve been; we cannot possibly determine where we’re going until we accurately answer the first question. Forecasting is intended to be far more accurate than budgeting.

Why do we forecast? Because one of the basic tenets of effective Accountability Management is to Plan our Work, and Work our Plan! We need to forecast what is happening in the market place today as opposed to dividing the annual budget by twelve. (A weather forecast for twelve months from now is not very accurate!) An effective forecasting and reporting process will foster improved communication between departments and enhance the department managers’ knowledge of their departments, and the departments of their fellow managers. Departmental management’s commitment to a forecast will enhance accountability and provide the executive staff with more accurate expectations for the short term.

Remembering that attaining a budget depends on developing and executing a series of successful forecasts, let’s list the questions that are important to consider when we forecast:

• Who should develop the forecast?  The best forecasts are “bottom up" rather than “top down.”  Those employees that participate in and understand the process take ownership of the forecast.
• How big will the market be?  If you believe there will be a significant change, why?  Understand that you cannot change the size of the market.
• What will be your share of the market?  If you expect your market share to increase or decrease, what will cause that change to occur?
• How many transactions will your target market share represent?
• Will your revenue (Sales, Gross, or both) per transaction increase or decrease? Why?
• What will be your overall transactional revenue?
• What additional resources (people, inventories, and capital) will be required to achieve your transactional revenue target? Are these resources realistically available?
• What specific action plans must be implemented in order to achieve your transactional revenue target?  Can these action plans be realistically accomplished to impact the forecast period?
• Does your projected expense structure effectively match your targeted gross profit level? In order to achieve the projected expense structure, will you need to reduce expenses from your current level?  If so, how?
• What else must you do, as a manager, to ensure that your forecast is a “promise” and not a “wish”?

With this in mind, I wish you much success in finalizing and executing your 2012 business plan.

Implementing a disciplined budgeting and forecasting process is one of the subjects taught in the Principles of Advanced Financial Management class at the NCM Institute Center for Automotive Retail Excellence.

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