“I need help with my expenses. How can we spread specific expense items across departments?” I get this question a lot, and frequently the person asking has a personal agenda that they need to support with my answer. In this article I’m going to help you sort through a wide range of common expenses that are billed across departments, and how these expenses should be allocated to maximize your dealership’s success.
Common approaches & mistakes
#1: The pre-set prorate
The most frequent approach I hear from dealers is that they simply spread the expenses according to a pre-set prorate percentage for each department. This could be based on: gross profit contribution, the experience of the dealer, or I’ve even heard suggestions that we use the Z-split (our pre-determined proration approved by the dealer once every couple years). While this practice is a quick way of doing it (and we would highly recommend you design a departmental pre-set percentage prorate), the downside is that this may only apply to a few accounts or particular expense items. Unfortunately, this is not a one-size-fits-all solution.
#2: Vehicle advertising across departments
If you’ve been around for a while, you have most likely heard of this old trick: Spreading vehicle advertising across all departments. The argument for this approach is that all departments benefit from advertising, so they should get their dealer-approved percentage of a prorated share. Unfortunately, the service manager, the parts manager, and the used car manager may have had no input in the design, concept, or advertised message. It is also quite possible that this expense was not budgeted for new car advertising in the forecast plan. The big downside to this approach is that it can encourage ill-will between departments, and end up causing more issues than it solves.
#3: Splitting free oil changes
If your dealership offers free oil changes (for a variety of different reasons/situations), you may think about splitting these oil changes evenly between parts and service. On paper, this sounds like a good idea because it’s easy to calculate. The downside however, lies in “why are we giving away free oil changes?” For example, if we are giving away oil changes to assist in closing the deal on a new or used car sale, should we charge the new and used vehicle departments a share of this? Or should it all be billed to their department and not at all to service or parts? Again, the solution to this problem is not as easy as it seems.
The most effective way to divide expenses across departments is to establish a consistent system for your controller. No matter what the expense item, or which departments are involved, the controller (and the dealer) must weigh what managers are benefiting from the expense and what managers are generating from the expense. After taking these factors into account, the controller can then bill the expense appropriately. No manager wants to pay for expenses that another manager is creating without their input, and your expenses should reflect this. The controller (or their assistant) must make the time to train all accounting personnel on the required investigation of any expense item.
Some examples and tips
- An accounting person (biller) may only work for their dealership’s new and used vehicle departments, so maybe that person is expensed at 60% new / 40% used. Another accounting person may work mostly for the parts department and used vehicles, but also for new and service. Maybe their percentage breakout should be 50% parts / 30% used / 10% new / 10% service.
- What about utility bills? I would suggest you try to calculate how much is used by each department and work out a legitimate split for each month’s utility bill. I have even seen a dealer use six meters on his property and each one served no more than two departments. Each meter billing had its own expense prorate based on number of furnaces, light bulbs, and electrical outlets.
- I always recommend that you try to be as direct as possible on every expense invoice and every expense item. By ensuring every expense dollar is charged to the manager that bought it or used it, your entire dealership has accountability for their overheads.
It’s so easy to just Z-split and move on, but that approach is not the best in most cases. What if one manager is trying to manage his/her budget, and another manager really doesn’t care about it? What if one manager is trying to transfer expense dollars away from his/her department to another, unsuspecting, manager? If we use the Z-split method, we’re not respectful of our managers, and our accountability is called into question. Even worse, we now have a built-in excuse for when overhead numbers are out of control.
Don’t fall into the “this is the way we’ve always done it” trap. If you take the time to manage all the expenses by charging them directly to the managers who are buying and benefiting, everyone involved learns more about the expense item. I guarantee that if you take the time to get more people involved in the process, and learn about expenses, your entire team will work harder to save your dealership money.
Learn more about expenses and dealership F&I by joining an NCM 20 Group, scheduling in-dealership consulting, or attending an NCM Institute course. Give us a call at 800-756-2620 to find your expense solution today.