Front-end, back-end, parts, labor - every segment of your dealership affects your bottom line in a slightly different way. When details are overlooked or processes go unchanged, your true profit figures can become distorted. This can have an adverse effect on growth planning, inventory management, and the accuracy of your tax strategy.
Let’s look at how quickly financial strategies can become distorted when inventory accounting and payroll decisions are misaligned.
Masking Real Performance
Every dealership goes through periods where everything lines up perfectly and it seems that you can’t keep a car on the lot.
It’s important to remember though that high sales numbers do not automatically equal profitability. If those are the only numbers being considered when assessing the financial health of the dealership, what may be inadvertently happening is that the true financial picture may end up being masked.
Remember, total revenue is just one part of the profitability picture.
Understanding Key Profitability Drivers
Understanding the specific dynamics that are involved in decoding a dealership's profitability can help with business tax planning.
Factors like:
- Labor growth percentages
- Profit growth percentages
- Floor plan interest rates
- Payroll balance
are some of the key profitability drivers across the dealership so a misalignment in any of these areas can disrupt a dealership's taxes, affecting long-term profitability and growth.
Common Practices That Can Distort Dealership Profitability
Looking at the financials from any one aspect of the business can only tell a dealership owner part of the story. But without piecing all of the details together, that story may not have the ending you think it does.
For example, it’s important to understand:
- What the floor plan interest is
- The effect inventory timing has on capital
- What impact on growth commission-heavy payrolls can have vs hourly or salary-only employees
Let’s look at that last point.
Do your compensation packages align with your sales and growth projections? Are they structured for the future? Or the now?
This difference has a direct effect on the numbers you report for your taxes, so it’s important for planning that they scale accordingly.
Creating an effective tax plan is contingent on understanding how factors like these affect the way money doesn’t just come into or leave a dealership, but how it moves through it. This involves a nuanced study of the numbers to determine precise quarterly sales vs the timing of expenditures.
This baseline knowledge can help you make growth decisions that reflect the reality of the business vs building solely off of sales numbers.
Building a Transparent Tax Planning Strategy
Understanding the areas that can lead to financial misalignment in a dealership’s tax strategy is the first step in the process.
The next step is to proactively dig into the details. That can often be done most effectively by a CPA who can offer objectivity as well as experience.
At Matthew Schlanger CPA, we have worked closely with dealerships of all sizes. We understand how misaligned inventory accounting and payroll decisions can dilute profit forecasts and mask the tax planning opportunities for a dealership.
If you’re ready to uncover these areas in your dealership and take a proactive approach to tax planning, contact us today for a consultation.