They say, “failing to plan, is planning to fail”. And now is the time of year dealer principals, financial controllers and departmental managers should be thinking about next financial year's budget.

Why develop and maintain an annual budget?

A budget is a forecast of the future operating activities of a business. Whilst financiers and distributors may be the first to require a budget to accompany actual financials and / or a business plan, a budget's primary function should be to provide management with a guideline and projection of the activities necessary to reach desired goals.

A well executed budget also serves as a means of measuring the efficiency of operations as the year progresses. In comparing budgets against actual results, it is easy to identify areas those that are performing below expectations and enable management to modify actions or processes to minimise and reverse the impact of an adverse trend.

A budget should also allow you to consider and forecast seasonal peaks and troughs in both income and expenditure thereby recognising the stronger and weaker periods in your business, rather than expecting the same result every month.

In providing an achievable forecast to each of your managers, your key staff can focus on optimising Sales targets and where possible, control expenditure. Consider incentives and exciting management to meet and exceed budgeted targets, to create a positive environment that ultimately benefits you the business owner and your management team directly.

Enough theory, let's look at an overview of how to prepare your annual budget…

While the past may not always reflect things to come, your historical information should provide a solid basis for determining what your facility is capable of. All of our ITK / ITKonline clients have access to historical monthly trends by department and this information can be placed alongside a budget entry tool. In being able to readily reflect on your historical achievements, you should be able to assess and deliver realistic goals, based on prior experience and consideration of economic conditions.

Sales forecasting considerations…

The sales forecast is critical to the budgeting process because virtually everything else a dealership does depends on sales…

For your New and Used Vehicle departments - forecast unit sales considering model lines, retail and fleet; forecast the average gross per unit, and holdback per unit. There are traditionally weak and strong months, and being able to forecast the hills and valleys proves fruitful at the point of comparison.

For Finance, Insurance and Aftermarket sales – consider penetration rates then forecast finance, insurance and Aftermarket sales based on unit sales for your New and Used departments.

For Service – consider customer retention rates for forecast Retail, Unit deliveries for Pre-delivery and Internal sales, and review history for Warranty sales. Review and update based the historical margins for each category. And finally, the ability to consider the days your shop is open for business to reflect monthly highs and lows for monthly gross generation.

For Parts – consider the various sales types, Retail, Warranty, Internal, Trade, etc. and their respective margins. Similarly, by basing the potential monthly achievements on daily targets, the budget can be realistically compared on a month to month basis.

Expense forecasting considerations…

Variable or selling expenses – the name implies a direct relation to sales activity and can therefore be based on unit sales or departmental gross.

Personnel expenses including on-costs – based on a summary of the salaries for the employees in each department including consideration of staff changes or planned growth.

Semi Fixed expenses – depending on the expense, can be based on a fixed amount per month, on days in the month or may even be activity based. There are likely to be some semi-fixed expenses that are volume based (or at least should be budgeted and compared in that manner) such as Floor plan charges and Vehicle Advertising expenses.

Fixed Expenses –As the name implies, is generally a fixed amount every month.

Bottom line considerations…

Conversely, you may wish to build your budget "from the ground up". That is, to firstly identify what you know your expenses to be. From that determine what income each cost centre needs to contribute to achieve the target profit you seek departmentally.

In summary…

Obviously for the purposes of this article, I've spoken about the annual budget which can be a very effective management tool. Once established, the annual budget can be further broken down to assist departmental managers with weekly and daily operational control.

Managers should be heavily involved in the budgeting process however, by nature managers will set conservative targets as their incentives may be based on meeting budget. That said, it is important that you review your budgets at a "key performance" level to ensure that each department is going to achieve desired outcomes and that your business is capable of delivering the kind of return you wish it too.

A balanced budget will be one containing the right balance of realistically achievable numbers that also meet the expectations of the dealership's shareholders.

If you are a member of the ITK / ITKonline community and would like to implement or review your budgeting tool to complement your actual management reports, CDS is happy to assist. Many of our existing ITK clients currently prepare their budget in a workbook inside our ITK product, which replicates the departmental structure of your monthly trended reports. You can bring these results together either at the time of your monthly import of your trial balance, or specifically by requesting the ITK Comparative feature on the View menu.

ITKonline dealers further benefit in being able to upload the budget data to facilitate interactive scrutiny and comparison by each manager in your business with Graphing, Drilling, Traffic Lighting and Alerting facilities a strong part of the toolkit.

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