The MHEDA Journal - Second Quarter, 2013 - (Page 31)

MONEY ABSORPTION MATTERS Absorption Measures Performance and Sustainability BY ROBIN CURRIE O ne of the important measures that Currie Management Consultants, Inc. uses in all Currie Financial Composites for equipment dealers is the absorption measurement. Absorption has been referred to as a simple, but not simplistic measure of dealer performance and sustainability. It is a measurement used to indicate how much of a company’s total expenses can be covered by the profitability of the aftermarket departments in an equipment dealership. The basic formula to calculate absorption is: Total Aftermarket Gross Profit $ (Parts, Service and Rental) / Total Dealership Expenses $ = Absorption rate For example, if your dealership has combined gross profit in the aftermarket departments of $8,000,000 and overall company expenses of $7,500,000, your absorption calculation would be: 8,000,000 / $7,500,000 = 107 percent The model absorption for the equipment industry is 100 percent or better. Why is absorption so important? Here are some points that will help you understand why achieving model absorption is something that all dealers should continue to strive for. When absorption is at or above model, profitability in the sales department (units) becomes a less impactful issue. Margins in unit sales are often difficult to control, thus strong aftermarket profitability can take us through periods of volatility in unit sales. Studies have proven that dealers with high absorption will be in a position to continue showing profitability even in down cycles. Dealers with high absorption rates are able to spend more money on the sales department, and we encourage them to do so. By adding additional sales reps and sales department support people as needed, the dealership is able to increase coverage. By following a comprehensive account management strategy, the dealership is now in a position to effectively increase, or at the very least, maintain unit market share. The increased coverage should also enable the sales team to further penetrate existing accounts and to continue in the acquisition of conquest accounts. Research tells us that dealers with the highest absorption rates also have the highest return on assets. As we often explain to our dealer clients, ROA is one of the most important measurements for a dealership to track, as it affects almost all other measures in the company. Further, it was discovered during the General Electric PIMS study, and variations on the original study, that market share correlated with ROA more than 90 percent of the time. With the added dimension of market share opportunity, working toward a high absorption rate becomes exceedingly important. Now let’s talk about how dealers can improve their absorption rate. Revenue growth occurs through an excellent account management process. The traditional structure of units, parts, service and rental as separate, segmented offerings is no longer appropriate in today’s markets. Instead, dealerships should be continuously developing their “package of value” to include all departments as part of a customer solutions focus. The new mentality should provide for account management coverage by managing the totality of the account as a team. Thus, an account may be visited by two or more people from the dealership during a sales call – such as the sales rep and the parts rep. Increasing aftermarket gross profit is the next focus, as it directly affects the absorption equation. The fast track calls for an increase in parts pricing by examining the matrix and analyzing it by customer. Are all customers The traditional structure of units, parts, service and rental as separate, segmented offerings is no longer appropriate in today’s markets. Instead, dealerships should be continuously developing their “package of value” to include all departments as part of a customer solutions focus. The MHEDA Journal | Second Quar ter 2 013 31 http://www.naylornetwork.com/dis-nxt/

Table of Contents for the Digital Edition of The MHEDA Journal - Second Quarter, 2013

President’s Perspective
From the Desk of Liz Richards
Ask Your Board
MHEDA Member Profile
At Work
The Next Economic Cycle
In Case of Emergency – Disaster-Proofing Your Supply Chain
Annual Convention
Convention Program
Exhibitors' Showcase Floor plan
Absorption Measures Performance and Sustainability
Exhibitors’ Showcase Product Guide
The Parachute Congress Made
Get Your Game On
An Expert, Advisor, Resource and Single Point of Contact
What Looks Good on Paper
Instilling Work Ethic in the Emerging Workforce
How to Get People to Do What You Want Them to Do
Search Engine Marketing Value Proposition
New Members
Spotlight on Association News
MHEDA University Calendar
MHEDA Milestones
New Products
Index of Advertisers by Product Category

The MHEDA Journal - Second Quarter, 2013

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