Your 2018 Budget: Volume and Gross Budgeting for Sales

How is your budget shaping up for 2018? Having fun yet? This is the second part in a series of blogs on how to create a budget that will help you achieve your growth goals. In Part 1, I shared tips on how to do a SWOT analysis. This installment will tackle volume budgeting and gross budgeting. 


SWOT: Strengths Weaknesses Opportunities Threats 


Once you’ve completed your SWOT analysis for your entire dealership, you want to identify where your greatest revenue opportunities lie. The first place most dealers will think of is sales, so let’s go there. 


Volume Budgeting 


Review your sales volume from the current year and compare it to the market place. What is your share of new registrations? On the new car side, are you a pump-in or pump-out? Meaning, are you losing market share or gaining market share? You can get this data from your OEM and/or from IHS Markit/Polk.  


Once you’ve got a number and a trend for your total new car sales, break it down by model. If you’re in Silicon Valley, you may be selling tons of small electric vehicles, but not so many pick-ups (and vice versa if you’re in Texas). If you’re underserving the market for certain models, view that as an opportunity for growth.  


You also want to do an analysis on the pre-owned side. What is your market share within a 10-mile radius (or 50+ mile radius if you are in a B or C market)? Do your competitors have a greater percentage than you? Again, obtain detailed information from IHS Markit/Polk or from a cross-sell report. 


Once you’ve identified what the revenue opportunities are, the next step is to identify the “why,” as in why you are not maximizing them currently. If your competitors are doing better than you, further investigation is required. Is it marketing, inventory or the attitude of your sales team? 


The first place to look is inventory. Does your inventory match the market demand? Are there certain models you are underselling because your sales team is focused on the best sellers? Is your average cost-of-sales in line with your market? Is your inventory competing or complementing the new vehicle side? 


The next item to review is your marketing strategy. Are you spending too much or too little? Are you using Google Analytics to identify your best lead sources? Most often, it’s not about how much you’re spending but what you’re spending it on. For example, let’s say you spent $500 on Facebook last month, got 10 leads and closed nine of them. You also spent $3,000 a month with Autotrader, got 20 leads but only closed six of them. It’s time to adjust that marketing spend.  


Once you’ve reviewed your inventory and marketing, the next thing you want to look at is whether the pay plans for your sales team and sales manager are alignedThis is a common mistake that many dealers make. Very oftenthe sales team’s pay plan is driven towards volume while the sales manager’s pay plan is driven towards gross profit. These are two different goals. If you want your team and manager on the same page, you need to have them working towards the same goal. 


For example, after your market share evaluation, you may have identified that your gross profit is fine but you’re getting the crap kicked out of you from a volume perspective. That’s a problem. Now you have to fix the problem. 


The best way to approach this is to take the problem to your team. Present your findings to them. Let them know that the current market dictates that your dealership should be selling 200 new units per month. It’s not the OEM or the dealer who is dictating this, it’s the marketCurrently you’re doing 150 new units. You should also be doing about 200 pre-owned vehicles per month, of which 50 are CPOs.   


If you explain why your pay plans are misaligned, you should be able to get buy in from your team and together arrive at a framework for how to align the plans. At the same time, you also get their input for how to better align your inventory with market demand and how to adjust your marketing spend. Have them take ownership of the fix. 


Gross Budgeting 


Once you’ve identified your revenue opportunities and adjusted for your inventory, marketing and pay plans, the next step is to figure the gross opportunity. To do this you’ll need data to identify the average gross profit per vehicle retail (PVR) in your town, city or region. 


Let’s say you’ve got a high-volume, metro import dealership. To be competitive your gross profit PVR for new vehicles must average - $500 per unit (this does not include performance bonus monies from the OEM). For pre-owned vehicles, let’s say your front-end gross profit PVR is $1,400. 


Now calculate back-end gross profit. You average $1,450 per vehicle gross profit from F&I. You’ve already identified that your goal is to sell 200 new and 200 pre-owned vehicles per month. What is your monthly gross profit goal? 


New car units: 200 x $1,450 = 290,000 – (200 x 500) = $190,000 

Pre-owned gross profit PVR: 200 x $1,400 = $280,000  

Pre-owned back-end gross profit: 200 x $1,450 = $290,000  

Total gross profit revenue potential per month = $670,000 


Of this amount, the next step is to identify how much you will retain in profitability. Let’s be average and retain 25 percent, or $167,500 as a net profit. That leaves you with $502,500 worth of expense to do business with (remember this is all in variable). 


Now you’ve arrived at your volume potential, gross potential and a budget for expenses. The next step is to figure out how you’re going to spend that money and where you need to make adjustments. In sales, the breakout should look something like this, in terms of percentages: 


Total expense budget: $502,500  

45% personnel and variable: $226,125 

35% semi-fixed expenses (including advertising): $175,875 

20% fixed expenses: $100,500 


There you have it, your budget for the sales department. Start with the end in mind, what do I want to net. What is your volume potential and gross potential? Set aside how much you want to net first, because your expenses can always be controlled. 


Easier said than done, I know! Starting with end in mind, telling yourself the hard truth about the market potential and PVR possibilities, and aligning inventory/pay plans/marketing spend is tough. Staying in the same place and accepting poor results is even tougher in the long run. 


In my next blog, I’ll go over volume and gross budgeting for the fixed ops department. 

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