In today’s data-driven world, dealership financial statements can initially appear overwhelming. However, by concentrating on key areas, you can extract valuable insights into your business’ financial performance and health.

Look Beyond the Income Statement

Many general managers and dealers focus primarily on the income statement and departmental gross profit. While these are important, the balance sheet holds equally critical information that often goes underutilized.

Investigate Negative Balances

Start by checking for any negative balances on the balance sheet. A negative balance typically indicates that an account is showing the opposite of its expected value and is often the result of a recording error. For example, a negative liability may suggest an overpayment or a missed expense entry. These discrepancies can distort your financial picture, as errors on the balance sheet frequently translate to errors in net income. Always seek clarification from your office manager if a negative balance appears.

Monitor Trends in Key Asset Accounts

Next, compare the balances in receivables, inventory and prepaid expenses to the prior month and the same period in the previous year. Developing a baseline for these accounts allows you to identify unusual variances that may warrant further investigation.

For instance, if receivables and inventory are increasing more rapidly than sales, a cash flow issue could be on the horizon. You might also discover expenses incorrectly categorized as assets. A common example is overstated labor-in-process due to payroll posting errors. If this goes unnoticed, it can accumulate month over month, leading to a major adjustment at year-end when reconciled by your tax accountant. This type of misclassification can falsely inflate service department gross profits over time.

Leverage Key Ratios for Performance Evaluation

Use financial ratios and metrics to gauge operational efficiency and identify areas for improvement.

• Net Profit as a Percentage of Sales: Compare this metric internally over time and with your 20 Group to benchmark performance.
• Personnel Expense as a Percentage of Gross: Labor is the largest controllable expense. Monitoring this ratio can help determine whether staffing adjustments are needed.
• Total Expenses as a Percentage of Gross: Review this regularly against the previous month and the same month last year. An increasing trend may indicate weakening expense discipline.

Final Thoughts

Understanding your dealership’s financial statement doesn’t have to be daunting. By focusing on crucial components — like spotting negative balances, analyzing asset trends and consistently reviewing key ratios — you can transform your financial statement into a strategic management tool. A comprehensive, rather than compartmentalized, review provides a clearer view of your dealership’s financial position and supports better-informed decision-making.