Why would you be interested in breaking even when you can make profit? One dealer from North Carolina brought this topic up at a 20 Group meeting. He felt that younger general managers are not aware of what it takes to break even in their store, or even how to calculate the breakeven point. He asked that the group be instructed on this metric, broken down by department.
What became evident in the process of carrying out this exercise was that many of the individual departments at numerous dealerships were not performing at their breakeven point. However, there was a silver lining. By doing this manual calculation, each manager could see how much more business they needed to produce to turn the red tide to black. They had found their breakeven point.
Calculating your breakeven point for each department
It has become a regular occurrence to include breakeven point metrics in the NCM composite as we review each department. It’s a critical part of calculating each department’s expenses, including fixed expenses, and the total expense to run the store.
The more we help dealers calculate their breakeven point, the more ways we find to calculate it. There is no one-size-fits-all solution. However, there are some great ways to get started.
To begin, ask yourself a question …
- How many new car retail deliveries do I need to break even in the new car department?
- How much gross per retail used unit do I need to break even in the used car department?
- Which margin percentage do I need to break even on parts sales?
- How many produced mechanical hours in a month do I need to break even?
In each question, we are taking the unit we are looking at to find our breakeven point, and dividing it by the total expenses to run the department (including the fixed expenses). It should be noted that the definition of total expenses could be an issue for some department managers, as some manufacturer financial statements may not distribute all expenses across every department. It is a standard practice for NCM to distribute expenses across departments in our proprietary composite for each franchise. We highly recommend doing this, as it removes the ability to mask the reality of your data. Every department is responsible for their fair share of each expense account.
How to calculate
- Total new car expenses / average total gross you feel you can accomplish (total front and back gross profit per unit retailed) = # of retail units required to break even
- Total used car expenses / # of retail units delivered = per unit gross required to break even
- Total parts expenses / total parts sales = parts gross profit margin required to break even
- Total service department expenses / gross profit per hour = # of hours required to break even
These are very simplified equations to some extent, since there are many variables to account for in each department. However, the concept is consistent across all departments. What must you do, as a department manager, to break even? After that, you can start planning how you’ll move beyond breaking even. THAT is when you profit.
Learn more about your dealership metrics by joining a 20 Group or scheduling in-dealership consulting from NCM. Have a question? Call us at 800-756-2620!