Take Your Profit First

NATM News,

An Excerpt from “You’re the Problem (and the Solution)” by Bob Clements and Sara Hey

Many of the dealers we work with put themselves last. They put everything and everyone else first—their employees, their expenses, their sanity—until there is nothing left at the end of the month for them. When we start talking about cash flow, it’s not uncommon to hear an audible gasp as this is a subject that dealers don’t want to touch with a ten-foot pole. In my mind, I think that’s because there are major misconceptions around cash flow and money in a dealership. Many times, it starts with your employees. Your employees assume that, since you own the dealership, you go home at the end of the night and count your piles of cash, which is all locked in a secret room in your house that you designed specifically for that purpose. If you are doing that, more power to you; but, if you’re not, you are like most dealers around the country.

While your employees might see money coming into the dealership, what most employees don’t see is the large amounts of money going out of the dealership. They assume that since you sell X number of units a year, you just put that money directly into your pocket. They don’t see the cost of the equipment, payroll, payroll taxes, liability insurance, workers compensation, building maintenance, or any of the other hundreds of expenses you have to pay from your ever-thinning margins. They may assume you are filthy rich with no care in the world and can’t reconcile why you aren’t driving an expensive sports car to the dealership every single day. We all know that the scenario many of your employees have created in their heads may not be reality.

The struggle, many times, is how you bridge this gap of the misconceptions that the people around you (and maybe even you) have around money management inside of your dealership, with the changes that need to happen in order to have a profitable and thriving business. And heck, a happy and full bank account.

So, let’s work on changing the misconceptions that you walk into your dealership with, and start taking your profit before anything else. The idea of taking your profit first may seem a little (or a lot) overwhelming. So, how do you do this without feeling like you are going to faint every time?

1. Make the decision that things aren’t going to remain the same.
In Habit One, we talked about our surviving-versus-thriving vision. Surviving is a fine place to be, but not a place you want to stay. You are not doing anyone any favors being the last one paid, or not being paid at all. You have put too much time, sweat, and tears into your dealership for it not to provide you with the life you want. So, plan to take your profit first. Step one is to make the all-in, scary decision that you are going to make a change. This means that you choose, from now on, to pay yourself first, even when things seem like they are getting tight.

What you are getting ready to do makes a lot of logical sense from a numbers standpoint, but emotionally it will feel uncomfortable. As you begin this process and experience this discomfort, you will have to make the decision over and over again that you are going to require your business to pay you before anything else gets paid. So long are the years of looking at your P & L statement and seeing that you made a profit but have no idea where it went. So long to paying yourself but not cashing the checks. You are going to know exactly where it went because you are taking it out on a regular basis.

The decision you are getting ready to make is that you, maybe for the very first time, are going to take control of your cash flow, and not let your cash flow take control of you. How do you do this? You do this by creating a budget that pays you first. What is left, after you are paid, is what you have available to pay your employees and the other expenses that come with running your dealership. What do you do if there isn’t enough? You either need to increase your revenue or decrease your expenses. I wish there was more to it, but there isn’t. You have to make the decision to deal with being uncomfortable, so that you can gain control of your dealership, your life, and your sanity.

Do you know what the easier, but disastrous, option is? Letting your cash flow take control of you. Do you know what will help you be profitable and help you sleep better at night? You, taking control of your cash flow. It’s up to you. Do you want easy or do you want money in the bank? This decision is solely up to you.

2. Start with 1 percent.
So, you decided to choose money in the bank, over easy, or at least you are really starting to consider it. How do we start? How is it that after this decision your bank account will start reflecting the choice?

To start, I want you to pick a percentage that you, as an owner, are going to take as profit or retained earnings out of your business, as well as a salary. It doesn’t need to be big, but I need you to get used to taking a paycheck. So often, the dealership owners we work with take a little here and there out of the business, wait until the end of the year, and hope to see something left in the bank account.

So, instead of taking the approach that doesn’t work, pick a percentage that you want to set aside as profit or retained earnings, and an amount of salary that you deserve for all of your personal investment, risk, and liability. Then, off the top of your budget, deduct the percentage you’ve decided on from the profit that is produced and set it aside. Then, deduct the amount of your pay. The portion that’s left is what you are going to operate your business on.

If just simply reading this is giving you incredible anxiety and possibly heart palpitations, start with 1 percent off the top. That’s it. One percent of every dollar of profit produced in your dealership should be deposited in a separate bank account. This money is for your use. You can hold it as retained earnings, pay yourself as a distribution or dividend, or maybe begin to reimburse yourself for money you have previously invested into the dealership. How you do this may be decided by how your business is set up: sole proprietorship, LLC, S Corp, or C Corp. Connect with your CPA to make sure you are taking this money out of the business in the correct way for your situation.

Here’s an example of what this looks like. Let’s say you expect to gross $100,000 in revenue next month. From that you generated $9,000 of gross profit in sales, $10,000 in parts gross profit, and $7,500 in service gross profit. You now have a $26,500 pool of gross profit to run your dealership for the month. You would take 1 percent out of that amount ($265). Then, let’s say you plan to pay yourself $3,000. You would deduct that amount.

$26,500 – $265 – $3,000 = $23,235

This leaves you $23,235 to operate the dealership on for the month.

Moving forward, look at the next month. You know the season will begin to slow down and you anticipate bringing in only $80,000. Using the same percentages as before, sales would produce $7,200 of gross profit, parts would produce $9,600 in gross profit, and service would produce $6,000 in gross profit.

So, your gross profit pool now has $22,800 in it. Take the 1 percent ($228) and set it aside. Deduct your gross salary of $3,000 and the rest ($19,572) is what you have to run your dealership on for the month ($22,800 – $228 – $3,000 = $19,572).

If you fear it will not be enough, then now is the time to consider how to increase revenue or decrease expenses. No matter what, don’t leave yourself out of the equation. This will force you to consider other approaches to fix the problem. If you are wondering how I came up with the gross profit numbers, I used our balanced dealership approach. As we work with dealers, we work to have 60 percent of gross revenue generated by sales, 25 percent by parts, and 15 percent through service. I used a 15 percent gross profit margin on sales, a 40 percent gross profit on parts, and a 50 percent gross profit on labor.

The most important part of the exercise is that you created a habit of paying yourself first. Is 1 percent where it ends? Absolutely not. You should work toward the goal of putting 10 percent of every profit dollar produced into your pocket. I know that seems like a huge number when you are simply celebrating a 1 percent payment to yourself, but it is possible.
Something interesting starts to happen when you give the business less money to run on. You and your team will find a way to adjust expenses and force your business to run on what is available (or you will find new ways to make money).

Think about it this way. If you were given a brand-new tube of toothpaste, how would you use it? At first, you might be overly generous with the amount of toothpaste you put on your toothbrush. If some extra fell off and landed in the sink, it wouldn’t be a big deal. However, if I were to give you a tube of toothpaste with only a small amount of toothpaste left in it (and you couldn’t go buy any more for at least a week), how long could you make it last? My guess is as long as you needed. In fact, I bet you could make that toothpaste last two more weeks! When you feel like there is an excess of resources available to you, you typically get careless in using them. However, when you feel like what you have is scarce, you use it more wisely. That’s exactly the mindset shift that I need you to take on in regard to your money. Take what you should off the top and learn to run the dealership on what is then available or left over.

3. Put your 1 percent (or more) somewhere you won’t touch it, and have someone hold you accountable.
Where you put your money is equally as important as taking the money out. Now, I’m not saying an account in the Bahamas is the answer; that just looks shady. But you can’t leave your money in the same account that you pay your expenses out of (or an account where you will be tempted to loan it right back to the dealership—we know you do this!) because you know as well as I do that the money will be simply absorbed, and your hard work and determination will be all for nothing. When that happens, you feel defeated and wonder why you even tried.

So, open a separate account simply for this money. That’s all you want to put into this account. Maybe you know yourself well enough to know that a separate account at the same bank won’t do and you need to move the money to a different bank that is not linked in any way to the business. If that’s what you need to do, just do it. There is no judgment here. Our focus is simply that we want you to get in the rhythm of having your business pay you, as the owner, on every single profit dollar that is generated each month.

Some of the dealers we work with go one step further when starting to implement this change. One of our advisors has his dealers send him a picture of the “off the top” check as proof that they are taking it out of the business. Above that, he asks them to tell him what they are going to use the money for. Sometimes it is to accomplish a goal they have set, maybe it is designated for something fun, or at other times it’s simply to help them survive. Now, you may or may not need that accountability, but I will tell you, if you aren’t currently paying yourself on a regular basis from your business, at first, it will feel strange. And, if you need someone to tell you that it’s okay to pay yourself first, I’m here to tell you, IT’S OKAY!! In fact, it’s critical.

4. Consider doing something fun with the money you are earning (at least in a small way).
The last step is the best step. This is where you get to dream a little. Think about something you would like to do and how you could use this money on something you and your family would enjoy. Maybe it can go toward a vacation or furniture fund, savings for a lake house, or just a night out at your favorite restaurant. You have worked hard to generate this revenue in your business, and now is your time to celebrate your hard work, risk, and focus. So, pick something fun and do it.

Now we need to turn our attention to another matter. Let’s say that after you take out your salary, there is not enough money to cover all your expenses, specifically your employee expense. It might be that you are overpaying your people. Let’s walk through how you should calculate what each employee, by department, should be earning.