“If you don’t know where you’re going, any road will take you there.”
While this adage is at first humorous, it has great meaning for dealers who are determined to improve their overall business performance.
The title of this series is “Planning for Profits,” and the most important part of planning is forecasting. In this column, we’ll describe why and how the best dealers forecast their business. They do so by literally planning their profits.
Many dealers work with a budget, but a lot of them don’t. Those who do develop a forecast often do so for new wholegood sales only, and it’s usually done to satisfy suppliers who require it in order to plan their production.
Top-performing dealers forecast in the same way that they run their business. They use a process that consists of knowing their customers, integrating all revenue sources, assigning accountability for results, and developing a budget for expenses and assets that use economic targets.
In our experience, only about 5-10% of all dealers develop a full forecast using the methods that we describe in this column.
Those who do produce results that are significantly better because of the time, effort and consistency that they apply to forecasting. It’s worthwhile to understand how these dealers develop and utilize a forecast.
There are 3 key elements for all successful forecasts.
1. Forecast all revenue sources and influences on each.
Because new wholegoods are the core business of most dealerships, that’s what gets the most attention when it comes to budgeting.
But top-performing dealers forecast all revenue streams, including new, used, parts, service and rentals. Each of these represents a distinct revenue source that requires its own marketing approach. At the same time, each segment is also complementary to the other. Higher new sales often leads to more used sales, for example.
A basic understanding of the cyclical nature of agriculture and the factors that affect the industry is a must to develop an effective forecast. Some of these are commodity prices, net farm income, exports, etc. These external factors serve as a guide to the overall demand of the industry.
Other sources of external information are surveys of other dealers, like those conducted and published by Farm Equipment magazine.
For parts and service, many dealers who forecast will merely apply a simple increase or decrease to the previous year, say plus 5%. This adjustment usually accounts only for inflation or price increases from their suppliers.
Economic or industry factors are only a guide to what might happen to your business on a local basis. To improve forecasting of all of the segments of your business, you’ll need a thorough understanding of your current customers and future prospects. Successful dealers fully understand the different needs of their different customers and how they affect each revenue stream.
2. Know Your Customers and Set Targets for Sales
Top-performing dealers manage well because they know what to anticipate and set high expectations for results because forecasting and planning are a key part of their management style.
It’s also essential to set aggressive, but achievable targets, for employees. They need goals to shoot for. At the same time, they must also be held accountable for reaching the targets while not losing focus of customer needs.
Returning to the subject of revenue sources, we highly recommend differentiating customers and prospects by past purchases, distance from the dealership, credit rating, brand preference, etc. These can usually be sorted into 4 categories, (e.g., A, B, C, D) with each category requiring a different focus for each revenue source.
For example, “A” customers might purchase the highest percentage of new equipment and, by definition, buy regularly and in volume. These customers purchase patterns for equipment change only slightly, and vary with the ups and downs of agriculture. “B” customers also buy mostly new equipment and are highly affected by business cycles.
“C” and “D” customers might be most frequent buyers of used equipment, as well as parts. If you want to accurately forecast these segments, it’s important to understand these customers and their annual needs.
When doing a forecast, dealers who manage their sales in this manner are able to develop more accurate projections for each department in the dealership because they are driven by individual customer needs.
These dealers are also able to set sales targets for all revenue-generating staff (sales people, service technicians, parts counter people) that help them achieve the forecast. Individual accountability is why top-performing dealers set and meet aggressive forecasts much more consistently.
3. Plan for profits.
Up to now, we have discussed sales forecasts, but it’s profits and cash that you put in the bank. This is where the rubber really hits the road. Highly successful dealers not only forecast sales, but also forecast expenses of their dealership. They also take into consideration the resources required to meet their forecasts.
Expenses should be forecast by department using benchmarks set by the best performing dealerships that are similar to yours. Information on these types of ratios are available from the major manufacturers and the North American Equipment Dealers Assn.
Through our experience facilitating NAEDA peer groups, we’ve found that one of the biggest benefits to dealers participating in these groups is in comparing their expense ratios to those of other dealers. This aids greatly in better understanding the differences and modifying business practices to improve expense control. These benchmark ratios are an essential part of effective forecasting and planning.
Another key part of “planning for profits” is applying productivity benchmarks to sales revenues. For example, to sell $10 million in new and used wholegoods, how many sales people are required? Or to sell $2 million in service, how many technicians are needed?
We find that many dealers are limited in their sales by the number of revenue-producing people. Many of them could increase sales by hiring and training more “sellers.” During the forecasting and planning process, you can balance sales forecasts with the expenses needed to properly staff your dealership to increase overall sales.
The road to a more successful dealership must include effective forecasting and planning. Forecasts must be developed for each department, and should include a direct link between different “types” of customers and the targets set for your organization. They must also include projections for the expenses and assets required to grow your business.