BUILDING AN EFFECTIVE FORECAST
While our retail industry is getting more sophisticated and savvy with new generation leadership taking over, I believe that if you ask the question if a retailer has consistent forecasts to plan their business with, perhaps 50% would say no.
Some might say yes we do have target sales every month, we budget our spending every month, we focus on target gross margins etc., 50% would not be able to say that they prepare a complete forecast for the store every month based on their franchise financial statement format.
Even then, I am not sure that some of the eminent guide lines are followed when putting together a forecast. In most incidents forecast is “wish list” of numbers that one wishes to achieve because someone says this is what you are expected to do. The results at the end of the month becomes far from that of reflected on the forecast.
A realistic forecast must have statistical reliability, tools and mechanisms in place to achieve the goals, clear understanding and “buy in” by the leadership team and recognition and rewards associated with it.
On the revenue side and for the variable department you must take into consideration:
1- Prior year same period stats
2- Change in market conditions
3- Your inventory levels and assortment
4- Lead generation efforts
5- Quality of sales staff and their stats
6- Management perception of required gross generation
This will allow you to determine realistically how many vehicles can you sell and how much revenue can you generate.
Same applies on the fixed ops side with a few different stats to review:
1- Repair order count anticipated
2- Dollars sold per repair order ( labor and parts)
3- Gross profit margins ( labor and parts )
4- Wholesale and retail parts revenue based on history and seasonality,
Must be considered additionally.
Determining the expense structure requires additional set of information and stats. You must first deal with current reality and compare your expense structure to available composites and benchmarks either from your manufacturer, association, 20 group or any other resources which provide good reliable data for these expenses. One caution is that whatever data you use, before you compare make sure that all of the income including the ones at the bottom of the page are combined as gross revenue before you start comparing expenses as a percentage of gross profits otherwise you will not have an equitable comparison.
Then focus on the moving targets that end up being most difficult to predict and control. These culprits usually are:
1- Sales commissions $550 PVR or 13.5% of total gross revenue
2- Advertising expenses $550 PVR net of co-op
3- Policy and goodwill Less than 1% of total gross revenue
4- Outside services Discretionary
5- Office and other supplies Discretionary
6- Technology/data processing Discretionary
You must take into consideration some of the performance benchmarks as a guideline no matter what and enforce processes to achieve them. These benchmarks are:
1- Net to gross including all revenue 20/80
2- Employment expenses (excluding technicians) $1,250 PVR or less
3- Semi fixed expenses 18% of total gross revenue or less
4- Average customer pay RO per new vehicle retailed per month 4.5 CP. ROs or more
If you digest these numbers and target them in your monthly forecasts, provided that your leadership team understands the objective your results will come closer to your forecast each time. Try it and you will have fun and success.
AS always if you have any questions on this topic feel free to send me an e-mail or better yet pick up the phone. See you next month.
Phone: (310) 717 1876
Fax : (310) 883 0019