Most dealers agree that their dealershipâs absorption rate gives them an important snapshot of their businessâ health and is a key to profitability, especially when new truck sales are down. Absorption shouldnât be ignored, but itâs also not the be all and end all of profitability.
Adding to the confusion, absorption rate often is calculated differently from dealership to dealership. Are you including the correct factors in your calculations? In order to make your absorption rate work, you need to carefully assess your processes and avoid making broad, sloppy cuts in favor of making well-informed decisions carved with surgical precision.
Use Consistent Benchmarks To Create An Honest Reference Point
An absorption rate is meant to give dealers a glance at the true financial balance of their businesses, but if calculated improperly, it can skew this vision and allow money to drain away sometimes totally unnoticed. In a time when businesses of all sorts must watch their expenses diligently, correctly calculating benchmarks like absorption rate is more important than ever.
âAbsorption measures the capacity of a dealership to operate profitably without ever selling a truck,â says Keith Ely, managing partner, Keith Ely & Associates.
âTechnically, absorption rate is gross profit from fixed operations, which is body shop, service and parts divided by your total dealership expense less selling expenses,â says Allen Phibbs, dealership operations professional advisor, also of Keith Ely & Associates.
âSelling expenses are salespersonâs commissions and delivery expenses for the trucks,â adds Ely. âFloor plan is not a selling expense. Some people will say, âThatâs not how we calculate it.â Theyâll include floor plan as a selling expense, but we donât.â
Not including floor plan as a selling expense is a wise choice for most dealers. Dealerships usually donât own all of their trucks. Finance companies often own the trucks and charge dealers monthly interest for having their truck in the dealerâs inventory.
