The year 2015 may well be a trying one for many farm equipment dealerships. Recent record profits and tax incentives have allowed farmers to own a fleet of new or nearly new equipment. In the future, equipment purchases may be severely restricted if there are changes in earnings or tax rules. This scenario, coupled with growing used equipment inventories with declining value, makes it unclear where the ag equipment business is heading.
It’s more critical than ever to closely analyze trends, benchmark our operations against our peer groups and be prepared to change course to maintain the health and value of our business.
During an economic downturn, the successful dealers are those who closely watch the progress of their business and are prepared to adjust inventories and expenses rapidly to protect equity.
If you’re a member of a dealer association and annually submit your financial data for inclusion in the “Cost of Doing Business” survey, you have access to an important management tool. The information contained in the report is vital to benchmark the effectiveness of a dealership’s management practices and it begs to be used for comparisons the day it comes out and revisited as the year goes on.
Decades of Data
The North American Equipment Dealers Assn. (NAEDA) has been collecting data from equipment dealers for more than half a century through the “Cost of Doing Business” (CODB) survey, which is then used to analyze the financial picture of equipment dealerships in the U.S. and Canada.
The survey includes data from independent dealers who provide detailed financial and operational information for their individual businesses. This is then compiled and calculated to create average income statements and balance sheets, in addition to key financial performance indicators.
“There’s more emphasis on equity requirements. Manufacturers are looking at equity levels of 25% of total assets…”
The survey can be used by dealers to compare financial performance against other dealers in their region, or at comparable volume sales levels throughout North America, and to identify areas of needed improvement. Of equal importance, especially if a dealer principal is planning to exit the operation, it can also be used to value a business for estate planning or ownership changes.
Today, the Western Equipment Dealers Assn. (WEDA), with the cooperation of other participating dealer associations and their members, compiles the survey. According to WEDA Chief Financial Officer Curt Kleoppel, who leads the project, “The report compiles information from 375 dealers representing approximately 750 locations. Five years ago, there were 500 dealers participating, representing about the same number of locations. Dealer consolidation has reduced the number of owners.”
Kleoppel analyzes the information in the report to help dealers identify problem areas and fine-tune their management skills. He says dealers who come from a sales background may tend to ignore the data. “If there’s cash in the bank and the dealership is making net income, everyone is fat and happy and there’s a tendency to become complacent. But, especially with dealers being the size they are and with the ability to gather and analyze computer-stored financial data, there’s a compelling reason to use the information.”
Inventory turns are one of the primary areas that the survey benchmarks for comparison with other dealers. Kleoppel says it’s a main indicator of success. “If you’re turning your inventory 1.5 times, you’re not comparable to other dealers regardless of your volume level. Usually a turn of 2-2.5 times is very good. A higher volume dealer will sometimes reach up to 3-4 times inventory turn and that’s better.”
Of course, the turnover numbers are based on a dealer’s ability to maintain proper inventory levels and that needs to be a focus.
“The manufacturers are putting a lot more emphasis on equity requirements, so the big key is to seriously analyze inventory because they’re looking at equity levels at 25% of total assets,” he says.
Even assets that are floorplanned by the manufacturer count against equity requirements, so more inventory equals a need for higher profits or more capital in the business; the latter being something that most owners don’t want. Kleoppel adds, “Because the inventory on the balance sheet is one of the biggest numbers and farm equipment dealerships are so asset-intensive, it’s one of the key areas to pay careful attention.”
“Expenses can get out of hand. The larger volume multi-store dealerships have a distinct advantage in this area…”
Expenses, also benchmarked in the CODB studies, are another figure Kleoppel says needs close attention.
“Operating expenses can get out of hand in a dealership,” he says. The larger volume, multi-store dealerships have a distinct advantage. Their operating expenses are probably 10% or less of sales. A smaller dealer can’t reach that level; it just isn’t feasible. That’s why it’s important to compare your numbers in the survey to dealers with roughly the same volume as your own.”
Another key indicator to look at is return on equity, which is a number that has improved with the advent of larger volume dealers.
“Back in the 1980s, if a dealership had a return on equity of 10-15%, they were doing pretty well. Now you’re seeing that number up to 25-28% or more. There’s also been a corresponding increase in the bottom line, or net income. Thirty years ago that number might have been 1-1.5%. Now you’re seeing 5-7% up to as high as 8%, which is very strong,” Kleoppel says.
WEDA has a subsidiary that Kleoppel leads, called Equipment Dealer Consulting LLC, which does accounting and advisory work for dealers. He says that typical new clients are often in need of improving gross profit margins and many of the problems relate to trades.
“They may develop different practices regarding the way they take trade-ins or how they actually approach trades once they’re in inventory,” he says. “You see a lot of dealers incentivizing salesmen to move used equipment a lot faster than they were before. We see dealers holding out commissions until the trade-in has been sold, which is a good practice. Used equipment levels are growing and it’s a big issue that will likely continue to be even more so. The more keys you have in place to keep reasonable values in used equipment, and keep it moving, the better off the dealership will be.” (WEDA Dealer Institute is offering a course in “Managing Used Iron” later this year. For information, contact Michael Piercy at firstname.lastname@example.org.)
Managing Expenses & the Service Department
Dealerships tend to be judged by sales volume, but one rule has never changed: the service and parts departments need to cover all of the business’s expenses. Kleoppel says the CODB survey results often reveal problems in these areas and help dealers identify solutions.
Using the Numbers to Plan & Put Out Fires
Most dealer principals and managers know what they should be doing, which includes studying financial statements, tracking where the dealership stands, and making management decisions to improve the profit picture on at least a monthly basis, right? The reason it’s difficult is that many have come from a sales background and would much rather be out trying to capture another customer than sitting at a desk looking at numbers. Suppliers tend to back up that philosophy when they’re hammering dealers about market share. It’s easier to go try to make one more sale and worry about combing over the financials later.
Todd Kunau of Kunau Implement Co., a 2 store Case IH, New Holland and Kubota dealership in DeWitt and Preston, Iowa, is a third generation owner who’s in the process of trying to change the culture to allow more number crunching.
Kunau admits that it may sound like “overkill,” but he pays close attention to the Cost of Doing Business studies, utilizes the “Spader Management Link,” as well as being a member of a “20 Group” of dealers that meet together regularly to share and analyze each other’s financial information. He also participates in a CNHI business management system that tracks success between other dealers representing the same product line. He’s made it a priority to consistently analyze his dealership and believes a bright future can be achieved by tracking numbers, even though it runs counter to the traditional culture of the business.
When he purchased the dealership from his family, Kunau says, “It was more management by the ‘seat of the pants.’ They looked at how much money was in the checkbook, who owed them money and what machines were coming due. They managed these sorts of things and then they went out and sold hard.” Kunau wanted to make it a priority to have the discipline to look at numbers every month, to do budgeting for all departments, and “be able to compare where we are to budget, where we need to be at the end of the year, and what we can do to change those numbers as we go.”
Kunau values comparing his dealership to those of his peers. “Probably the most interesting thing is it keeps me focused and let’s me see what numbers are possible or ‘how much better can we do? It gives foresight into where the business is going and calls out warning signs if areas need improvement.” Most of the time he pays closest attention to sales, parts and service margins, absorption rates, inventory turns and other financial indicators.
While Kunau is moving from a “put out the fire burning closest to you” management style to a “plan for the future” outlook, he warns that a healthy store has to have both components. Having grown up in the dealership, he had always witnessed his dad spending a lot of time dealing with hot customer issues and thought “that’s not very efficient. I was trying to eradicate the firemen and change the folks that were into putting out fires, because of the adrenaline rush of being a hero. But I found that adrenaline rush leads to efficiency and more focus on throughput, both in sales and in service. We still need a balance, it looks like we were both right!”
Kunau says the numbers are currently giving him warning signs in the used equipment area. He is witnessing a rise in inventory and has taken action to more closely scrutinize each trade. “We’re trying to be very frank with our vendors and very resistant to ordering equipment unless it has a legitimate customer retail opportunity attached with it.”
With the mountain of financial data available to equipment dealers to assist in maximizing profit and avoiding missteps, it seems the only barrier to improving management practices is the commitment and time to do so. Being a dealer that makes examining financial data a priority will not only add to the value of their business, but also raise the standards of the entire industry, benefiting all.
“They can compare their service department to dealerships across the U.S. and Canada,” he says.
Service department personnel can be a major challenge for owners and managers, and trying to find, train and retain top technicians may seem like an never-ending task. Technicians tend to be driven to the highest paying job in the field. Agricultural dealers are constantly at risk of losing people to construction and automotive careers, and to oilfields when petroleum prices are booming. In many cases, farm equipment dealers have been perceived as only having low tech and lower-paying positions available, which has caused some candidates to avoid entering the business.
Kleoppel says new compensation practices may be needed to stem the tide of exiting quality technicians. He believes dealers need to utilize technology more widely to develop efficiency reports, so tech productivity can be closely scrutinized on a regular basis.
In othere words, service personnel should be monitored to determine who is making money for the business. “A lot of people are looking closely at recoverable costs in the shop and which techs are doing the most work, who’s doing the most billing, how efficient they are and what their ‘comeback’ ratios are. It’s important to find out what the ‘true bottom line’ is or what the technician is bringing to the dealership. Once you identify who the top mechanics are and how they’re performing, you can set their pay scale to that level and allow them earn even more based on productivity. Today, top service techs can make more than $100,000 and are paid on a straight commission basis. Initially, most techs want a base salary, but once they see the results of working on commission, things tend to fall into place.”
The idea is that technicians who believe they are being appropriately compensated will work harder, covering more of the business’s expenses as a result.
Before instituting a commission-only shop compensation plan, Kleoppel says it’s important to closely examine the infrastructure of the service area. In order for techs to increase efficiency, they must have the tools in place to do so, and that may mean more space, overhead cranes and a fairly hefty investment. The shop itself may be the limiting factor.
“Some shops are confined to a certain level of work that can be done. They may have 11 mechanics working in a shop where they should really only have 5, but that’s done because of the volume that has to get out the door,” Kleoppel says. “At that point, it may be wise to bring in a service consultant who understands the industry to make recommendations for improvements both in facilities and pay programs.”
“Another recurring problem for the service department is warranty recovery…”
Kleoppel advises against falling into the trap of trying to make the service department look better on paper by having technicians bill out unapplied time to various activities that don’t bring in cash. “That’s how a lot of people try to improve the way the service department looks,” he says.
“They’ll bill out every mechanic’s time for activities like sweeping the floor. Sweeping the floor is nice, it keeps the dealership clean, it looks good, but it’s not making much money. The key is how much billable time is actually billed compared to what you’re putting in as cost. Dealers striving for a 100% absorption rate may be forced to find ways to bill out tech time, but they’ll find it’s not really a ‘bottom line’ number. Other departments will absorb the costs and it may kill sales.”
Another recurring problem for the service department is the warranty recovery. Kleoppel routinely sees big numbers in the “lost warranty” category.
“A lot of times you find that warranty claims are not being processed on an efficient basis and those dollars can add up pretty quickly,” he says. “If the survey shows a big receivable for warranty sitting on the books, that’s cash.
The faster and more efficiently you can process those claims, the more profitable your service department, and your overall dealership, is going to be.”
An area that generally falls under the jurisdiction of the service department that needs to be closely scrutinized is the transportation department. Kleoppel says, “Trucks are getting bigger, there are more permits and licenses needed, and there’s drug testing and insurance requirements, all of which have increased costs vs. 10 years ago. You want to make sure your billing rate, either per mileage or by event, fully covers costs.
“You’re seeing fewer dealerships going out to pick up the equipment and bringing it back to repair. More are making investments in larger service trucks, so service can be done wherever the machine is so it doesn’t have to be brought to the shop. This helps the service department, because the tech with the service truck can be billed out at a higher rate, and in addition saves the customer money because the job is done a lot quicker than bringing it into the shop.”
Don’t Underestimate Parts
Parts departments generally don’t have the same types of management issues as service due to advances in technology, which has greatly improved procedures and controls. Changes in ordering have enabled most dealers’ parts inventories to be “pretty clean.”
Kleoppel says, “You shouldn’t have a lot of obsolete parts, especially with manufacturers allowing you to return parts each month, and you need to take advantage of that. If there’s inventory that’s not moving very quickly, it needs to be off the shelf and exchanged for a credit toward faster moving parts. Going forward, parts ordering should be ‘spot on,’ because they know what’s moving quickly, what’s on hand and when they need to order it.”
“How do you position your company for succession planning and can you improve its value...”
While inventory tracking technology and advances in shipping have greatly improved parts department performance, parts inventories can still add up quickly. “It’s not a small number on the balance sheet like it used to be; it can be millions of dollars, so you’re looking at quite a bit of investment, and for the most part, parts are paid-for inventory, so it’s actual cash sitting on the shelf. They need to be turned at least 4 or 5 times a year to be successful.”
A new bright spot in the financial realm for many dealers is selling GPS systems to farmers. Precision farming, or information technology, barely existed 10 years ago, but sales of related products and services are now contributing to many equipment dealers’ profit pictures. It’s now a separate line item on income statements with a new department emerging around it. In the WEDA territory, there is now an average of half a person per dealership devoted to servicing and marketing products in precision farming area, a number that will only grow as technology evolves.
As with service techs, long-term salespeople need to be valued by dealerships. Kleoppel sees a trend among younger salespeople to change jobs more often. “There have been a lot of dealerships in the past with salespeople that would stay around 10-15 years or longer. Today, you’re not seeing that as often. If you have someone with 10 years’ experience or more, then you’re doing pretty well. It is important because of the relationship with your customers that needs to be maintained.”
He recommends paying more on commission and less on salary, to allow salespeople to maximize earnings and remain loyal to the dealership.
Likewise, with multi-store locations, maintaining managers is a key to success. Kleoppel recommends compensation packages tailored to the individual to maintain longevity, “whether that be part ownership in the company, attainable goals that lead to additional compensation, or even allowing a month leave of absence. You’re seeing more compensation packages set up similarly to the financial and automotive industries to keep top management because that’s what it takes to maintain multi-store businesses.”
He says, if financing can be arranged, they may even be considered to be included in succession planning.
A concern for the industry is the average age of owners. Reflecting the farm population, many owners are near retirement age and mapping an exit strategy may be the most critical use of the Cost of Doing Business studies.
“How do you position your company for succession planning and can you improve its value? If you’re 50 years old, the sole owner and you know you want to be out in 15 years, how can you position your company to get the top dollar for your business at that time?” Kleoppel asks.
“Part of it can be by comparing your company to the industry, both in North America and your region. If you can show potential buyers that you’ve beaten the average numbers of your peers, your dealership will be more valuable and easier to sell. And if you have management in place, that’s a big key, too.
“Things can happen quickly. In the past, the agricultural industry has been slow to react to changes taking place…”
“The last 3-4 years have been excellent for agricultural dealers. Everyone connected to the industry knows that. Last year (2014) was a decent year; this year it’s anyone’s guess what will happen, and it’s looking like a mid-range year in terms of profit. The big issue will be the used equipment market — how much of what’s there gets carried into 2016 and how much gets added to inventory? A big key will be what Congress does with section 179, the additional depreciation section of the tax code,” Kleoppel says.
“Going forward, it’s critical to keep a watchful eye and utilize the Cost of Doing Business study to watch turns and gross profit margins, while also keeping up with trade-in guides and auction values to accurately evaluate equipment coming in.”
He adds that there are a few financial indicators in the CODB study that every dealer needs to track for the long-term health of their business.
“Return on equity, inventory turns, total asset turns, gross profit margin, current ratio, operating expense percentage and debt-to-equity are probably six or seven numbers that you want to constantly review,” he says. “It’s like looking at your bank account to see how much money you have. If those key ratios are constantly improving, your company is on a good trend. Unfortunately, the trick in 2015 may be how to adjust to changes.
“I think that’s what a lot of dealers need to be aware of and when the market does change, how adept are you at recognizing that change, how it will affect you and how to react to it?”
The same applies to a downturn in the market. Kleoppel asks, “If you’re operating with 200 employees and things aren’t selling, how quickly can you change, cut costs and do what needs to be done?”
“I don’t think we’re there yet, but I think it’s something dealerships should really look at closely. Things can happen very quickly, and in the past, the agricultural industry has been a little slow to react. If the used equipment market drops abruptly or you see a big decrease in sales, and you’re carrying the same number of employees, something has to give. You have to keep an eye on your operating expenses and your sales percentages and be able and willing to change.”