Six 'Farm Equipment Dealership of the Year' alums share their approaches to managing four areas that will make an impact on every dealership's bottom-line health in 2009.
For last year's annual "Dealer Business Operations" issue in February, Farm Equipment interviewed four "Dealership of the Year" alums to share their best-practice approaches on several areas that affect a dealership's bottom line.
Based on the interest from the February 2008 article ("Managing the Margin-Makers"), Farm Equipment returned to the concept again this year, examining how five award-winning benchmark dealerships approach four areas of vital importance to a dealership's health and viability. This year's topics covered:
- cash flow management
- interest costs
- parts and service absorption
- used equipment evaluations.
After years of outstanding agricultural equipment demand (in which a frenetic pace can relax processes and controls), taking a reflective look at your operation and instilling some of the discipline that may have been lost is a wise exercise, particularly as we enter uncertain times. Reading the following pages and the operational advice from America's top-performing dealers can help you jump-start that process.
While this article focuses on getting a good handle on what most impacts the financial statements, that alone won't get the job done. Ron Birkey, CEO, Birkey's Farm Store, can cite several dealerships with sound fiscal awareness that later closed their doors. Along the way, he says, they lost touch with the customer and could no longer bring them in. "You must be fiscally responsible and also know your customers' operation," he says. "Missing one or the other will put you out of business."
And despite the economic situation, Birkey points out that some customers will have an even better year in 2009 than 2008. "Those are the ones you will want to be especially close with right now."
Several of the dealers interviewed cite the principle, "Cash is king." As Birkey puts it, "Most dealers that go out of business don't do so because they weren't profitable; it's because they became insolvent. Dealers can be profitable but run out of cash." Several dealers shared that many of their fellow dealers still overemphasize profitability, yet cash flow is what matters most in this business.
Jay Pickrel, Jamestown Implement, Jamestown, N.D., says that cash flow management will be even more critical in the days ahead. "The latter half of 2009 and 2010 will demand that the cash flow is controlled in order to ensure financial viability of the dealership," he says.
Several dealers say low-hanging fruit for improved cash flow positions starts by avoiding the tendency to become the bank for the farmer. "Unless a dealer has tremendous amounts in cash, there's not much use in being a banker," says Birkey. "You can put those available dollars in a lot of other areas to drive a better bottom-line."
"We've worked with our sales staff to get down payments on equipment and to collect balances when delivered or sooner," says John Janssen of Fred Haar Co. "With machines ordered so far out before they're available, this has become a must."
Vincennes Tractor's Rick Linenburg also stresses downpayment at the time of order, and notes that his dealership has virtually no accounts receivable, as all but a few accounts are all run through Farm Plan.
"We're focused very tightly on asset turns," says Pickrel. "The secret to cash flow is maintaining asset turns equal to or greater than 6 times. At a 6-time turn, we're able to generate control over cash flow," he says, noting that it too carries few internal accounts and uses Farm Plan to control receivables.
Birkey agrees with Pickrel's focus on inventory turns, especially on used equipment. "If there isn't enough turnover of used inventory, you're tying up a lot of cash."
In the combine business, for example, he says the dollars you draw on that first sale simply keep going into the next unit — to pay the manufacturer, to take care of parts and service in the second combine, etc. "You're still investing in the original deal," he says. "You never get the cash until you liquidate the last unit you're going to sell."
Birkey says that when organizations focus too much on margin, turnover is stifled. "I'd rather have a 6% margin with 4-times turns than a 9% margin with 2-times turns," he says. "I want the cash."
Dealers help manage cash flow by taking full advantage of manufacturer programs — for parts stocking and wholegoods discounts, parts returns, and credit plans for customer parts and service purchases. Closing work orders and parts tickets as soon as the work is done (even hourly as is the case at Vincennes Tractor) is another means of keeping the cash coming in the door.
"Most dealers can figure out what they need to do to make a profit, but what many don't understand is what it takes to create cash in their business," says Birkey. "You've got to look for those things that create cash and accelerate them, or you have to turn your assets faster. Parts counter sales and customer labor sales are cash sales. Pushing the heck out of parts and service, and turning inventory, is what really creates cash for the company."
Champlain Valley Equipment's Brian Carpenter stresses the importance of cash with employees. "We discuss cash flow with our store and department managers so they focus on it as well as profitability." In addition to some of the ideas cited above, Carpenter sends equipment to auction if it becomes dead stock.
"We'll take a hit as needed to add what something is worth back into the checkbook so we can reinvest in moving stock," he says. "And when the dairy economy slows in our area, we'll tackle any paying jobs, such as building or logging, just to keep the techs busy. It's a constant struggle that everyone needs to be involved in or the cash will end up falling out of that unplugged hole on the backside."
Titan Machinery's David Meyer agrees that communication and follow-up are key. "We measure store managers on three metrics — market share, operating benchmarks and ratios and, now for the last 3 years, on cash flow, with an incentive attached," he says. "We true up their cash at the beginning of each year and let them participate with a bonus based on cash flow accumulated throughout the year. They're measured on their ability to manage the balance sheet and cash on hand; it's been a real positive for us."
Another key, says Meyer, is individual balance sheets for multi-store organizations — something he doesn't see too much of today.
"When you have just one common balance sheet, problems take longer to identify, and there can be a lot of finger pointing. One balance sheet won't hold all of the sites accountable. We want that individual accountability at each store level, so at Titan each store has its own independent balance sheet. It's provides the accountability at the store level — where it all happens."
Managing Interest Costs
If dealers are successful in inventory turns, they'll also find success in reducing interest costs, though it remains more challenging than it sounds. With floorplan interest costs starting to rise, this is an area that deserves high priority at every dealership.
The dealers interviewed stress pre-selling the trade so the item is paid for by the time payment is due. "Pre-selling the trades in advance of the new equipment arriving produces high turn rates and minimal flooring charges," says Pickrel. "We've devised aggressive financing programs with third-party lenders for maximum customer engagement in purchasing used product. Over 98% of the new equipment ordered is pre-sold for 2009, thus reducing any potential carrying cost outside of terms."
Vincennes Tractor advertises and sells used machinery as soon as it is traded for, often months in advance of the new machine arriving on the lot, says Linenburg. "We also try to recondition the used machinery within the first 10 days."
As already discussed, good cash flow practices enable dealers to finance less equipment and avoid the interest.
Carpenter keeps a watchful eye on new wholegoods orders. "We try not to order too much and target 2 times turns on new wholegoods orders unless the manufacturer offers better terms. Our philosophy is that it's easier to chase a product than to get hung with too much and have your cash all tied up. This is going to get serious as manufacturers raise floorplan interest rates."
As is the case with cash flow management, Titan Machinery incents its team to closely monitor interest-bearing equipment, something Titan refined this year. Of a salesman's total commission, 20% is based on his ability to manage the interest-bearing inventory. Second, Titan set up two outlet stores solely for used equipment. "After a certain age, it gets physically moved to the outlet store. It negatively affects the salesman and the store, but creates a behavior to get it moved before it heads to the outlet store. If you don't have that trigger point, it doesn't get the attention it needs.
"These sorts of programs align sales' interests with the best interests of the dealership. It gives them some skin in the game and focuses their attention on equipment the company is paying interest on. If the sales department is successful in managing inventory, then there's minimized floorplan interest and they are rewarded for that."
Linenburg adds that his sales team is made aware of due dates on all interest-bearing units, with particular attention on units whose dates are approaching. Occasionally, he says, sales staff is spiffed on aged equipment, including that which was appraised too high or has seasonal usage. Plus, every incentive program has a deadline.
If turns on interest-bearing equipment are being handled properly, then that only leaves the rate. Both Linenburg and Birkey bid out banking services, charges and loan rates. From Birkey's perspective, driving down rates with the borrower is possible only if the dealership is in a very sound financial position. "Our leverage is about 3.5 to 1. When you're in that position and provide good financial information to the banker and communicate monthly, they're a lot more comfortable with you."
Birkey's is borrowing at extremely low rates, he says, though he points out that the company spends a lot of time keeping its house in order, staying in regular contact with the banks and giving them far more data than required to build a high confidence and comfort level.
Improving Aftermarket Absorption
When it comes to possibilities for bottom-line growth, few areas of a dealership offer more promise than the parts and service area. A dealership with a good population of machines can survive on parts and service alone, as the gross profit of both departments can absorb 100% of the dealership's expenses. If dealers are aggressively soliciting that business, and working to improve efficiencies within their operations, it can be done, and can protect dealers if wholegoods orders slow.
Among the ideas shared by the dealers were flat-rate pricing, sales incentives, aggressive marketing, cost controls and efficiency gains that open technicians' capacity for billable time. The results are there for the dealership focusing in this area.
Take Jamestown Implement, for instance. According to Pickrel, the dealership is consistently producing double-digit increases in parts and service sales each year. Meanwhile, a store Champlain Valley purchased in 2004 has grown from $1.25 million in parts sales annually to nearly $2 million. "The shop increased its margins by 10% through better time management and accountability," says Carpenter. "Add these improvements together and our absorption is decent at roughly 80%. We need to capture more service work to get 100% absorption."
According to Birkey, manufacturers don't always allow enough gross margin on the parts, but the dealership always has the ability to control the margin in labor. "A lot of dealers fail to price their labor based on what they need. They look at what their neighbors are doing and are afraid to charge $2 more per hour. The fact is that no one is charging enough."
Nearly all the dealers have seen the benefits of flat-rate quoting and billing, which is in heavy use at Fred Haar Co., Jamestown Implement and Vincennes Tractor. Each is paying incentives for techs that are beating the established times. Pickrel adds that the customer also receives value through the use of marketing service times. "We add security with our internal warranty support program for all of our repairs," he says.
"We reward everyone in the dealership for selling and pre-selling parts," says Linenburg, citing direct account management by the sales department. "Selling parts and service is not a sideline but totally integrated into their job function. They have the tools to sell and order parts and service for customers when they make their on-farm calls."
Meyer says the biggest thing a dealership can do is examine technician efficiency. One of his nuggets of advice for other dealers is to look at the internal account numbers that are being used by the service techs. "A technician can be busy and efficient, but you may find out that too much work is not being billed to a customer. Instead, it's being assigned to some maintenance account at the dealership — not an outside customer. You can think you're making money when you're not. Eliminate those that aren't legitimate accounts, manage the signoffs and you'll see much better performance."
Fred Haar Co. is achieving higher aftermarket results by managing parts inventory better through ordering processes and bar coding. Titan is focused on ridding its stores of obsolescent parts, and now moves them to a central location where they are overseen by one person tasked with managing returns policies and other methods to get them off the dealership's hands. "The individual stores, with all they have going on, don't tend to do a good job of moving obsolescent parts," says Meyer.
At Champlain Valley, parts and service managers receive a portion of their pay based on margins and growth, with a kicker for turns, which has focused them on profitable growth.
Finally, a dealership needs to promote its parts and service operations and go collect the business. "We're very aggressive in marketing campaigns such as winter inspections and uptime programs," says Pickrel.
While the opportunities in parts and service appear obvious, Birkey says that successful aftermarket programs stem from the philosophy of the dealership. You won't hear of any of his managers saying that they can't bill more hours because there's too much internal work to do. He'd tell them to go hire two more techs tomorrow.
"So many dealers miss the boat because they're too focused on wholegoods sales. At our place, we tell our service techs that they need 2 weeks of work booked all the time. The problem is, the service manager doesn't want a guy around if he's going to have to worry about finding work for him. So it's the store manager that should be pushing the service manager to hire more technicians."
Birkey's breaks the mold from many in its vision of the service manager. While dealers have traditionally promoted their best tech to service manager, true service selling by this individual rarely follows. For Birkey's service managers, technical people who can manage time, communicate and sell at the same time are the preference. "You've got to drive parts and service sales and really promote it," says Birkey.
Accurately Evaluating Used Equipment
Accurate equipment valuations are a constantly moving target for dealerships. And with volatility in the market, the importance of wise evaluations is even more critical.
Explaining the art of used equipment evaluations caused much consternation among the dealers interviewed. "The greatest vulnerability is not knowing what that price should really be," says Birkey. "It's not like the auto world where so many units are sold that data becomes meaningful. In our business, there are so few units and the variability in specs and quality is so wide that data is not as good.
"There's so much voodoo pricing where guys dream up the prices. Some guys try to talk themselves into what the price should be. But then it's overpriced and sits on your lot." While he doesn't pretend to have the key, Birkey says "you can also manage used values so tightly that you'll never sell anything. You can be right on target but then not trade as much. You need targets, but also have to sell iron. It's more important to move it than be anal about how much you deserve."
Fred Haar Co. sends staff to dealer and consignment auctions for insight, and often asks several salespeople to weigh in on an in important trade to see if mindshare can be reached. "Taking a tech along to examine important items helps," says Janssen.
Vincennes Tractor holds weekly sales meetings where used evaluations are discussed. The salesman presents the item to the group that he wants to buy, says Linenburg. Using about every reference under the sun (including polling wholesale buyers who provide a floor value), the dealership tracks previously appraised machinery, searches for like units and compares to previous values set to test their pricing knowledge. The team eventually arrives at a buy number — which can only be altered by management, he says.
Jamestown Implement uses sources such as Used Express along with other auctions results from www.factsreport.com to keep on top of changes in equipment values. "We've also fostered strong relationships with surrounding dealers and meet on a periodic basis to discuss equipment values in our region," says Pickrel. "By combining these resources, we stay abreast of changes in equipment values and incorporate this knowledge into our values on a weekly and monthly basis."
At Champlain Valley, all trades are approved by either Carpenter or the store manager. "When it's a high-ticket item, we pay a shop tech to do an inspection. This minimizes our exposure and ensures we have more accurate information to make decisions, especially on close deals. If we don't get the deal, the sales department eats the expense, similar to the cost of a demo."
Titan Machinery tries to get staff to do research in advance of the deal and aims for 2-3 credible sources. But again, for Meyer, the key is accountability, and relates back to his firm's compensation structures. "The salesperson has skin in the game. If we make a bad deal, it relates back to the salesperson's compensation." Birkey's Farm Stores also stresses the accountability of each store manager, who has authority to buy used pieces. "We put a lot of focus and incentives on pricing it right. If he has a poor turnover or writedowns, then he didn't do a good job on that."