Dealers suffer from Fuzzy Math Syndrome
Dealers have a big and expensive problem with Fuzzy Math Syndrome.
Fuzzy Math Syndrome (FMS) comes into effect when accounting for the cost of reconditioning used cars.
Direct costs (hard costs) are simply the invoice totals for each service – this is usually where Dealers begin and end their analysis. They simply add up the invoices for the mechanical, parts, detail, photos, dent, paint, wheel, windshield and interior repairs and divide the totals by the number of units sold.
By only measuring the recon invoices dealers can miss as much as 50% of the total reconditioning expenses they are paying.
Indirect costs (soft costs) require one to consider other variables and assign a dollar value of the time spent on the reconditioning process by your hourly, salary or commission staff. Holding costs (floorplan and depreciation) also need to be included to have the whole picture.
Here is a list of Indirect Costs that can be plugged into a spreadsheet and calculated against the volume of used cars a dealership retails:
Sales manager time ($80+ / hour)
Service manager time ($70+ / hour)
Internal Advisor time ($30+ / hour)
Accounting personnel time ($18+ per hour)
Inventory manager and porter time ($17+ / hour)
Holding cost = Floor plan + Depreciation ($60 – $175 per day, per unit)
Software = $400 – $800 per month
Gross adjustments because of late invoicing and sloppy accounting / We-Owes and a missing costs on the recap.
Most of these costs hit the P&L below the gross profit line
Opportunity Cost – This includes the missed deals because the car isn’t through the shop, detailed, advertised and photographed quickly. How many more deals for more gross could have been made if your recon (including detail and all cosmetic repairs) was completed and the cars were advertised with great photos in under 5 days?
Reconditioning expenses are much more than just the RO for the shop and service provider invoices.
Don’t be a dealer with FMS.
Fuzzy Math kills net profit.
Indirect and Opportunity costs can land between $300 and $1500 per pre owned car sold.
If you sell more than 60 used cars per month the FMS problem equates to anywhere between $400k and $2m per year in missed net profit.