Auto Dealership Benchmarking

In Summary

• Dealerships should regularly use benchmarking ratios to evaluate their performance against industry standards, which helps identify operational inefficiencies and opportunities for growth to strengthen the bottom line.

• Important ratios to track include Asset Utilization (minimum industry standard is 6:1) and Net Profit Return on Sales (minimum industry standard is 3.25%), which reveal how effectively assets are used and the percentage of revenue converted to profit.

• Dealerships must monitor Service Absorption (average is 60%) to see how well service gross profit covers fixed expenses, track Service Department Proficiency (120%-150% standard) for labor productivity, and manage Used Vehicle Days’ Supply (30 days standard) and Parts Obsolescence (no more than 5%) for inventory control.

Atlanta car dealerships are constantly searching for ways to increase new and used car sales. For some this means enhancing the sales experience with new digital tools, offering online trade-in estimates, or an inventory locator. For others it is about offering competitive financing and other payment options. Regardless of the challenge, auto dealers are focused on growing the bottom line. While customer centric solutions are important, dealerships should regularly conduct benchmarking to uncover areas of opportunities and growth.  By evaluating performance against industry standards, dealerships can identify operational improvement opportunities. When properly leveraged, essential changes can lead to a stronger bottom line. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key ratios and benchmarks to track.

Benchmarking Ratios

• Asset Utilization – This performance indicator measures how effectively a dealership uses its assets such as vehicles, equipment, and inventory to generate revenue. It is calculated by dividing annualized total dealership sales by total assets (Less land and buildings). The industry standard is a minimum 6 to 1 ratio.
• Net Profit Return on Sales – This performance indicator measures the percentage of a dealerships’ s total revenue that remains as profit after all expenses (Including operating expenses), interest and taxes have been deducted. It shows how much bottom-line profit is earned for every dollar of revenue generated. It is calculated by dividing the total dealership net profit by total dealerships sales. The industry standard is no less than 3.25%.
• Service Absorption – This performance indicator measures the percentage of after sales gross profit (from the service department) that can cover the dealership’s fixed expenses. It is calculated by dividing the gross profits from parts and labor into the fixed expenses for the dealership. The higher the rate the more effective the fixed departments are at covering the dealerships overhead. While 100% is the goal most dealerships average a 60% service absorption rate.
• Service Department Proficiency – This performance indicator measures how productive the service department uses labor hours to generate revenue and complete work. It is calculated by dividing the number of hours produced by the total number of hours available. A desirable minimum is 100% but the industry standard varies between 120% -150%.  
• Parts Obsolescence – This performance indicator measures the percentage of parts in inventory that are considered no longer sellable due to decreased demand, age, or incompatibility with new technology. It is calculated by identifying the percentage of parts older than 12 months in inventory with no demand. The lower the percentage the better as it shows effective inventory management. However, the industry standard is no more than 5%.
• Used Vehicle Days’ Supply in Dollars – This performance indicator measures the dealerships total used car inventory and reflects how long it would take to deplete inventory based on sales rates. It is calculated by dividing the used vehicle inventory dollar amount by the average cost of sale. The total is then multiplied by the number of working days per month. It reveals how much inventory is on hand and how quickly it is sold. The industry standard is 30 days with an inventory turn of 12 times per year.

Contact Us

Benchmarking is an effective way to understand the effectiveness of existing operations while opening the door to improvements in the near and long term. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.