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Dealership Phantom Profits

August 16, 2010

As a dealer, you invest a lot of time and money into the dealership.  Are you being compensated for those investments?  The capital you have invested and your time have an intrinsic value.  If you include the true costs many dealers are losing money.  Those costs not expensed in the dealership generate phantom profits.

The majority of dealers self finance their used vehicle and parts inventory.  What is that annual financing worth?  If you took the money out of the dealership and floored the used and parts inventory, what would the cost to the dealership be?  These costs can often be overlooked or forgotten.
Another area that creates phantom profit is rent expense.  Dealers in older facilities or those who have paid down their mortgages usually have a lower than market rent factor.   As a rule of thumb rent should be 1% of your facilities fair market value.  If you are currently making $30,000 an average month, but have a discounted rent factor of $30,000, then you are truly breaking even.

Are you both the dealer and general manger?  If so, are you compensated the same amount as you would pay a general manager?   In most cases, the dealer is paid a lesser amount since the dealer usually takes dividends and the current salary has been set to cover his (her) monthly expenses without regards to market value.  It is important to know the true cost of your time and effort to have an accurate view of income.

In addition, the largest overlooked adjustment is income taxes.  Very few dealers book income taxes since the dealership is usually held in a partnership or S-Corporation.  If those income taxes were booked on the dealerships statements income would be reduced by approximately 40 percent which makes for a large variance in actual income.

If you are trying to show additional profits to the manufacturer, bankers or your 20 Group, I don’t suggest expensing these differences on a monthly basis, this would be counterproductive.  Many GM & Chrysler dealers that recently lost their dealerships wish they had booked as little expense as possible.  The advantage of booking these expenses is that you see your true net income and would be much more motivated to generate higher profits.  If you are satisfied with $100,000 profit, and you are hitting your goal make sure this is not phantom income.  If you are really only making $40,000 a month but you are looking to make $100,000, this new awareness will make your drive to succeed kick in.

Below is a table summarizing these phantom expenses:
 Monthly Profit 
   Used inventory interest expense
         ($1,200,000 x 6% / 12)
   Parts Inventory Interest Expense
         ($250,000 x 6% / 12)
   Rent Expense
         ($5,000,000 x 1% less $20,000 expensed )
    Dealer Compensation
        ($100,000 profit x 10% +$5,000 less $8,000 expensed)
    Income taxes (assuming the above expenses aren’t booked)
         ($100,000 x 40%)
Adjusted Monthly Profit with Phantom Income Adjustment