Cost Reduction- A Back Office Perspective

Presented by:

Automotive Services GroupAmper Politziner & Mattia, LLP

Seminar Objectives

• Provide a starting point for locating opportunities for expense reduction– Industry Guidelines– Year to Year variations– Expense as a percentage of Gross Profit– Expense per unit sold– Expense per employee

Seminar Objectives-Continued

• Moving forward from the starting line– Benefits to be realized– Challenging vendors– A list of vendor alternatives to assist in cost

reduction

• Provide ways to interact with department managers– Identify department needs– Consistent message and meetings– Seek employee input

Seminar Objectives-Continued

• Sample of ideas– Open discussion of cost reduction ideas

• Presenter ideas• Participant ideas

Getting Started-Why Cost Reduction

• Benefits to be realized– The office can help in the profitability of the

dealership.• A 1% reduction in expenses at a dealership that

2.75% of sales drops to income has the same P&L effect as a 1.04% increase in sales.

– Eliminating unnecessary expenses or wasteful spending can create additional cash reserves and company value

Getting Started

• Plan to reduce expenses

– Dealership wide reductions– Prioritized reductions– Departmental reductions– Budget reductions– Reductions based on analysis

Getting Started

• Cost Reduction Program

– Management planning on specific expenses not an expense wide 10% reduction

– Implementation of a plan of action with employees involved in the process

– Process to include a complete questioning of all expenses.

Getting Started-Identifying Opportunities

• Industry Guidelines– A Benchmark is a point of reference for any

measurement. These guidelines allow dealerships to measure themselves against an average, the best performers, or a geographic area.

– Comparing your results to benchmarks allows the dealership to identify strengths and weaknesses.

Getting Started-Identifying opportunities

• Industry Guidelines– Expense as a % of Gross Profit

• This guideline can show if your expenses are relative to the benchmark as a percentage of your gross profit. Are you spending too much on an expenditure in relation to your gross profit?

– Year to Year Variations• This analysis can identify expenditures that have

increased from one year to the next.• Utilize a Three Year Analysis

Getting Started-Identifying opportunities

• Industry Guidelines– Expense per Unit Sold

• This guideline indicates the amount of a particular expense per unit sold. Variable expenses such as advertising, vehicle maintenance and Floor Plan Interest can be measured per unit.

– Expense per employee• This guideline can help indicate whether employee

complement is appropriate

Getting Started-Identifying opportunities

• Industry Guidelines– Frozen Capital Analysis

• This analysis provides an indication of idle assets that if turned into productive assets may lead to additional profits.

– Cash Flow Analysis• This guideline will show what happened to the

profits of the dealership. Did the profits turn to cash. If not what happened within the balance sheet.

Getting Started-Continued

• Sources of Industry Guidelines– 20 groups – NADA– Manufacturer

• Under utilized programs– Financing Arm– CPA

Getting Started-Continued• Challenging Vendors-Best Practices

– Secure current bids for all major expenditures• Create your specifications carefully to secure current

bids• Obtain volume discounts• Challenges suppliers to bid price and value-added

services• Typical bids

» Insurance/Employee benefits» Office Supplies» Courier Services» Data Processing» Telephone» Contractor Services» Check guarantor services

Getting Started-Continued

• Vendor Alternatives– Utilize industry contacts

• ADAGP CFO 20 Group/ PAA CFO 20 Group• Supplier competitors• Industry Association members• Internet• Previous suppliers, bidders

• Request a new bid• Attached list as a starting point

Interaction with Department Managers

– Monthly Manager Meetingso Moderated and agenda set by Controllero Discuss analysis performedo Bring vendor invoiceso Create a forum for ideas on expense reduction

– Coaching on Financial Statemento Obtain Dealer approvalo Most managers have not had training on reading their

department’s financial statemento Show the impact of their actions

Interaction with Department Managers

– Open Lines of Communication• Create open dialogue between managers• Create a team approach-All oars rowing together

– Motivate through Pay Plan• Have a component of pay to reduce expense and

improve departmental profitability.– Include employees in discussions

• Monthly cost saving memo’s• Celebrate success

Ideas

• Limit Expense Authority to Department Managers– Hold departments accountable for Purchasing

decisions– Enforce purchasing policies– Use a purchase order system– Eliminate waste– Place dollar authorization limits on different levels of

authority in the business– Consider having a purchasing “Champion”

Ideas

• Monitor Departmental Budgets– Overall budgets without departmental budgets are

like having no budgets because there is no accountability

– Restructure accounting department– Force your accounting department to become a profit

center by allocating and monitoring budgets– Use your budgets to adjust your plans

Ideas

• Link Bonuses to Performance– Establish rewards and consequences system– Pay incentives frequently– Set clear and measurable goals– Set team goals and incentives– Set company goals– Tie compensation to the achievement of goals

Ideas

• Eliminate unnecessary Utility Costs– Most utilities offer no-cost audits– Check into

• Rates available• Time of day usage• Billing practices and accuracy• Energy saving technology• Policies and Procedures• Culture of conservation• Hiring a utility consultant

Ideas

• Reward your Employees for Bright Ideas– Who is the most qualified consultant for any business– Suggestion boxes don’t work, require that everyone

contribute ideas– 5-5-5-5 Program

• 5 ideas to improve the company• 5 ideas to improve their department• 5 ideas to improve their own role within the

department• 5 ideas to improve customer service

Ideas

• Reward your Employees for Bright Ideas– Employee empowerment comes when they know

they have the ability to create change. You must act on every suggestion

– Pay for suggestion

Ideas

• Lock the Supply Cabinet

– Office supplies expense increase every year at Labor Day– Instituting controls provides a typical supply savings up to

30% of what you are spending– Refilling cabinets with excess supplies in desks with an

Amnesty Day– Standardizing the supply purchases-------all non-standard

purchases require purchase orders– Substituting generic products for name brands– Encouraging re-using and recycling supplies (Binders,

scrap paper)

Ideas

• Trim the Cost of Credit Card Processing– Negotiate discount with vendors– Accept debit card payments

Ideas

• “Lease” your Employees to Other Businesses– Administrative people (title clerks, warranty clerks)– Level out seasonal needs– Full staff requirements – Partial expense

Ideas

• Take advantage of Purchase Discounts– 2/10 Net 30 = 35% per annum– Negotiate discount with every supplier– Negotiate long term debt repayment discounts– Schedule payments to take advantage of discounts– Set up a new general ledger account “Purchase

Discounts Lost”

Ideas

• Use Spare Cash to Pay Down Lines of Credit– Set up a cash management account to offset floor

plan expense– Use an automatic sweep arrangement against lines

of credit– You can re-borrow when you pay the line down, as

opposed to paying off term debt.

Ideas

• Form a Cost-Cutting Committee to Trim Waste– Create cross-departmental teams to assist each

other in increasing efficiencies– Find out what reduces productivity ( ask the people

who do the work)– Let employees set goals and help them achieve them– Employees are part of the process– Encourage a profit culture

Ideas

• Keep Tabs on Your Competitors’ Prices– Shop your competition

• Labor Rates• Parts pricing• New & Used vehicle sales

– Compare vehicle offerings– Find out if your price is too high or, worse, too low

Thank You!

Chuck Diegel Jerry Shinfeldcdiegel@amper.com jshinfeld@amper.com215-881-8882 215-881-8875

“The material contained in this presentation is for general

information and should not be acted upon without prior

professional consultation.”