Page 26 - On The Move - Volume 17, Issue 3

nario, is when the fixed operations with-
in the car dealership are not profitable.
In those dealerships, the new and used
sales departments are carrying all the
weight of keeping the dealership open.
When uncertain times come around, like
what is happening right now, it is entirely
conceivable that the dealership cannot
survive the hard times and could end up
have had heard the phrase “Fixed Absorption” used in many settings closing down.
I and in many ways. Although many of the meanings were basically in
the same vein, I think it is extremely important in today’s uncertain times To all the car dealership General Manag-
that everyone understand what Fixed Absorption is referring to and why ers, Service Managers, Parts Managers
and Body Shop Managers out there, your
it is so important to the financial health of a car dealership. dealership needs you! Not only is it your
responsibility to get the fixed operations
in your dealership profitable, but they
When discussed, Fixed Absorption is typ- scary days of dealing with COVID-19,
ically discussed in terms of percentages. that exact scenario is happening right need to generate enough gross profit to
The actual formula for what most people now for many car dealerships. pay ALL the bills.
consider to be Fixed Absorption is:
Having 100% Fixed Absorption should Can you do it? Do you need help? These
(Total Fixed Operations Gross Profit ÷ be the ultimate goal of every car dealer- are trying times and we are working
Total Dealership Expenses) X 100 ship. This provides the most security for through uncharted territory. Not knowing
= Fixed Absorption % the dealership. However, that is much exactly what you should be doing right
easier said than done. now is happening everywhere and to ev-
Some vehicle manufacturers calculate eryone.
Fixed Absorption using different compo- In order to manage it, you must first mea-
nents. However, the formula above is the sure it. My recommendation is to perform When the country gets back to work, I
purest formula. the calculation listed above and figure am betting the demand for vehicle service
out exactly where you are right now. and repair will be great. Possibly higher
Now that we know how it is calculated, Then make a plan to implement process demand (and expectation) than ever be-
let’s talk about what is means and why it improvement strategies for the purpose of fore in our history.
is so important to a dealership. continually improving that Fixed Absorp-
tion percentage. If you are currently at
The theory is if you can get your fixed op- 50% Fixed Absorption, make it a goal to
erations (service, parts and body shop) to get it to 60%. If you are currently at 60%,
generate enough total gross profit to cov- make it a goal to get it to 70%. The strate-
er (or absorb) all of the expenses created gy is to decrease your “need”
by the whole dealership (which would be to sell vehicles in order to re-
considered 100% Fixed Absorption), you main financially healthy (and
could remain open even if you didn’t sell open for business).
a single vehicle.
The worst-case scenar-
Imagine being open for business and not io, and unfortunately a
selling any vehicles. Sadly, during these quite common sce-

By Jeff LaMott
Division Manager
M5 Management Services
jefflamott@m5ms.com

24 www
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