Focus on all aspects of the business to be profitable

Fixed overhead coverage is a common term that in generally used in the motor retail industry.

Donald Christy

It refers to a measurement of the profitability of a dealership, excluding new vehicle gross and new vehicle variable overheads. It is expressed as a percentage of total fixed overheads of the dealership.

I think it is a valid measurement should you want to understand the ability of your business to survive with minimal new vehicle sales. In so doing, it does place focus on the performance of the other departments in the business and it forces you to ensure that the other departments contribute as they should. I am a firm believer in ensuring that each department should perform to its true potential, which in essence maximises your fixed overhead coverage.

The higher the percentage, the less vulnerable you are to short-term, new vehicle supply and sales. An example of what I mean is that if your used vehicle department has an efficient sourcing process outside of new vehicle trade-ins, any new vehicle supply issue will have less of an effect on your business than if your dealership is heavily reliant new vehicle trade-ins.

Ideally, this number should be as close to 100% as possible and if you are above 100%, it is a sign of a well-balanced and healthy business. It certainly means your business is relatively low risk as far as motor dealers go.

In closing, this is not an absolute measurement that should be viewed in isolation but rather one way of looking at business balance, business health and business risk.

There are always circumstances that are particular to your dealership that need to be considered in conjunction with whatever your fixed overhead percentage is. Find a formula that works for you and measure it regularly and see if you can move it towards or above 100%.

Dealerfloor (dealerfloor.co.za) and I will be publishing regular articles on dealership efficiency. The articles will cover various topics that focus on ideas and suggestions which, if applied, should improve the efficiency and balance of your dealership.

I am really looking forward to sharing ideas with you. Join the conversation by sending a WhatsApp to 082-776-1887 to be added to our group.

  • Donald Christy

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