April 2, 2007: Three easy math errors that lead to huge dealer losses

The state decided to tax prepaid maintenance. The dealership said OK, changed the category to “taxable,” shrugged their shoulders and went back to business as usual. It was mentioned only in passing as I reviewed other matters with the staff. But after a few minutes the implications of that change hit me and I asked them what they were doing about sales tax on the repair order.
They didn’t have a clue. And further, couldn’t see the connection.
Think about it.
They collect sales tax on the prepaid maintenance contract they just sold. They cut a check for that tax and send it to the state. The customer then comes in and has work done on his bike. The repair order is charged to accounts receivable, and the customer walks out without having to pay a dime. He’s happy. The bike runs great, and everybody had a great time.
Including the state.
When that repair order was rung up, tax was charged and included in your taxable sales. But remember, when the maintenance contract was sold, tax was charged and that sale was reported as a taxable sale. The dealer (you) collected the tax once, reported it twice and paid the state the double amount.
Was the customer ripped off? No. He paid what he owed, and he got what he paid for. That extra tax amount on the repair order was paid out of the dealer’s pocket. The resulting loss ends up as a reduction of profit on prepaid maintenance sales.
The dealer loses because he didn’t do the math.
Another example was a dealership I visited in the Northwest. Sales people were paid based on unit gross margin. A report was handed to the new payroll clerk that showed unit selling price, cost and gross margin. Pay was based on the gross margin.
No problem, right? Wrong.
I asked her what she was doing about ACV (actual cash value) and overallowances on trades. She looked at me and said: What is ACV?
So we went through it. We added up all the trade allowances, then summed the ACV of those trades. The difference was about $20,000 over-allowance in one month alone, which is OK. That’s how a sales operation works.
The problem was the accounting system was getting the right numbers because it was netting the over-allowance against sales, but her gross margin report, which fed the payroll system, was high by the $20,000 since it was run only on the deals themselves.
Result? The sales people got an extra $3,000 on their paychecks for the month. And this was in January! I figure that this one error would cost the dealership about $60,000 in excess payroll for the year by the time taxes and benefits were all added in. Once again, the dealer loses because he didn’t do the math.
One more?
A general manager, five years at the store, was doing a pretty good job, but parts gross margin was hurting and he couldn’t figure out why. So we tore apart the numbers, and it came down to the wholesale sales from that department — and there were a lot. I ran the numbers on these wholesale sales, and found that the margin was hanging around 16 percent. The manager looks at me and says, “But I have all these wholesalers set at Cost Plus 20 percent. How are they getting out of here only paying 16 percent above cost? Are they ripping me off?”
And then the hard lesson set in. Yes, his wholesalers were set at Cost Plus 20, but what he didn’t know was that a 20 percent markup does not yield a 20 percent margin. Markup is expressed as a percent of cost. Margin is expressed as a percent of selling price. They are two totally different things. In order to get his 20 percent margin, he would have to set each wholesale customer at Cost Plus 25 percent, which would then yield the required 20 percent margin.
So what did this little error cost the dealership? It had been that way for years, but let’s just take the past three years. His wholesale sales were running around $20,000 per month, or about $250,000 per year. His cost of sales was ($250,000/1.2 = ) $208,000 and his margin was ($250,000 – $208,000 =) $42,000. That same $208,000 marked up properly, at 25 percent, would have yielded $260,000 in sales, and a gross margin of ($260,000 – $208,000 =) $52,000. Finally, $52,000-$42,000 = $10,000 X 3 years = $30,000 in gross margin lost over three years because…
Nobody did the math, and the dealer loses.
OK, one final one.
Let’s say you have a set of boots that costs $100. They are marked up 40 percent to $140 retail (yielding a 29 percent margin). For whatever reason, the counter guy needs to sell these boots at dead cost, so knowing the markup was 40 percent, he hits the adding machine with $140 x .40 = $56. He then subtracts the discount of $56 from the $140, and lets the boots go for ($140 –$56 =) $84.
Dealer loses, because his parts guy didn’t understand the math.
You might run the best sales operation in town. But if you can’t figure out how to pay your people, mark up your merchandise and figure cost from retail, you are running uphill.
Do the math. Make money. And keep it.

Hal Ethington has been associated with the powersports industry for more than 30 years. Ethington is a senior analyst at ADP Lightspeed. He can be reached at Hal_ethington@adp.com.

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