In addition to analyzing overall profitability, auto dealerships should take the time to regularly examine the profitability of individual departments. To get the big picture on the parts department, for example, dealers need to look beyond the standard dealership financial statements and develop a detailed income statement for the department.

Getting the Big Picture

A dealership’s earnings statement will show the sales and gross profits for the parts department, but the dealer should consider more to accurately assess its profitability.

Initially, the dealer should account for the positive effects of the department’s volume on gross profit, for instance through discounts, stock order allowances, or appreciation based on parts volume. Likewise, the dealer should consider all expenses related to the department, such as salaries, taxes, and benefits of both parts department personnel and associated accounting staff, and expenses related to delivery vehicles, including maintenance and insurance costs.

The parts department’s profitability can also be affected by large parts inventories or receivables. Both extensive inventories and significant outstanding receivables can have a negative impact on cash flow, as well as generate opportunity costs in the form of lost income from interest. And any resulting increase in the need for financing creates additional interest expense.

Improving Profitability

To improve the profitability of a parts department, dealers generally need to increase the department’s sales volume. Attempts to make substantial cost cuts are difficult due to the numerous fixed costs involved in running the department.

Dealers might consider offering discounted pricing on a temporary basis to draw new customers. Dealers can also develop a marketing niche or brand identity by becoming known, for example, for having the fastest delivery, lowest prices, or broadest selection available.