F&IBest Practices

Financial statements track how you are doing financially every month. Consider measuring and benchmarking TCOR as a part of your ongoing financial statement process.   What is TCOR and why should you care about your dealership’s Total Cost of Risk (TCOR)?  Business is about keeping the money you make. Your sales and gross profits could be at record highs, but your losses might be, as well. Unless you are tracking TCOR, your money may be walking out the back door because of losses or customer problems. Consider changing the way the dealership accounts for losses at the store (TCOR).    The only way to improve in any area is to measure it and benchmark it. TCOR is a metric used to evaluate your dealership’s internal risk process. Here is how it’s calculated: Insurance premiums + self-insured losses + losses associated with lower profits and productivity + risk administrative expenses (internal & external) = Total Cost of Risk (TCOR)  Tracking this metric will help you laser focus on which parts of the dealership cost you money. Consider customizing and defining each aspect of the formula to specify the guidelines for your dealership. These guidelines will be different for every owner-operator. It’s important to be consistent in how you establish and execute the accounting at your dealership based on those guidelines. Consistency will produce accurate data leading to meaningful answers.  Here’s an example: Let’s say you sell vehicles to people who have credit challenges (secondary customers). In my experience, if you “spot” them in their vehicles, and then cannot get them financed for whatever reason, they tend to write more negative online reviews. Hopefully, you have a process at the dealership to bring them back in and try to satisfy them in some way.   (If not, start today. Most lawsuits and regulatory problems start with upset customers. In fact, a dealership in Tennessee recently had its license revoked after multiple claims of deceptive acts. Now, the owner has been convicted of twenty-one (21) felony counts. His problems all started with customer complaints. Pro Tip: After you have satisfied the customers’ concerns, ask them to “update” their review. If you ask them to “change” their review, the customers will feel manipulated, Then, it will look like the only reason you helped them was to have them update the online review.) If you tracked the personnel time and all other expenses associated with these types of issues, you would be able to determine the actual cost of taking care of these customers. This is only one aspect of TCOR. (Please refer to the formula above.) If the dealership accounts for these costs accurately, it means you can no longer hide these losses in “Other Income.” In many dealerships, “Other Income” becomes the “garbage pail” of accounts, where you charge expenses, so the managers who are paid on gross won’t complain about chargebacks.    Using the secondary customer example above - whether or not TCOR is being tracked - we can discuss which policies and procedures can be put into place to stop these types of losses. There are plenty! We will not know the effectiveness of the procedures unless the numbers are tracked accurately. Recently, I have been hearing dealers espouse a case of the “yets.”   “I haven’t been sued yet.” “I have not heard from a regulator, yet” “We haven’t had any major problems, yet.” So, I don’t need to track TCOR…  Depending on the accounting controls at the store, the losses may be bigger than you realize. Unless you are measuring these costs, it is unknowable how much money is being poured into issues at your dealership. Do you really know your risk costs? Reputational losses? Customer satisfaction charges? Please consider tracking and measuring these numbers moving forward.  I’ll bet you’ll be glad you did. 

By now, the entire industry and many consumers have heard about the chip shortage ready to hit automotive showrooms about the time our summer kicks off. A shortage of semi-conductor chips due to COVID slowdowns with production hit auto makers in the early part of 2021, and dealers are now bracing for impact. Popular vehicles like Ford F-150 trucks and other models are harder to come by right at a time when vaccinations and a lessening of restrictions are bringing car buyers nationwide back to dealership lots in droves.  While there are a lot of ideas on how dealerships can work around the shortage and continue to turn a profit, one theme that continues to resonate throughout the industry is to have dealers look to their used car inventory to shore up sales before the event. As we look to the summer buying season, what are some things you can work on now to ensure you're ready?  1. Build Trust A recent Marchex report shows more than 91% of people surveyed said they rate trust just as, if not more, important than the price of a vehicle. This becomes even more crucial when it's time to look across your used car inventory. What products can you use to your advantage to help build that trust with the customer? One of our favorite ways to show dealerships how to do this is with a Lifetime Powertrain Warranty. By offering a Lifetime Powertrain Warranty as an additional safeguard for the used vehicles in your inventory, you're adding another layer of trust to your guest's purchase.  2. Use Extras Just like our example with the Lifetime Powertrain Warranty suggestion above, throwing in extras to entice customers to move forward with a used vehicle has shown to be an effective way to move the needle toward a sale. Some of the add-ins we've seen that work well are: Warranties Free oil changes Complimentary tickets to a local sporting or arts event Even a contribution to the buyer's local charitable organization of choice  3. Do a Complete F&I Audit  Now is the time to look through and audit your current F&I offerings. Used vehicle buyers tend to purchase more ancillary products like dent and ding protection and paint repair. Some things to look at as you go through your audit – look over your disclosures to ensure you are up to date with compliance. Important terms to check include stating the purchase of products is not required to obtain financing, and the agreement or declining of products will not affect APR. Lastly, ensure every F&I product you offer is properly displayed on your presentation page with benefit statements for each.  4. Increase Promotion of Popular Used Vehicles Several models, like Ford F Series pick-ups, will continue to drive demand. The longer the chip shortage lasts, the harder these popular used models will be to find on dealer lots. Ensure you are identifying the most popular models on each of your lots and promoting them heavily as we move into the summer months.  While the chip shortage is not ideal, you can act now to shore up your used inventory and build trust to push buyers toward the used vehicles on your lot. A combination of promoting high-demand vehicles, auditing your F&I products, and offering incentives like Lifetime Powertrain Warranties can go a long way when building the buyer confidence needed to push you to the finish line this summer. 

What does criminal conduct have to do with F&I and my new toaster? Here you go... I recently bought a toaster. (Please hold your applause until the end of the article.) The toaster is so generic it does not even have a brand name on the instructions. "Instructions," you ask? For a toaster?  Yes, it came with a full-color, multi-step instruction, which is awesome.  There are "Single bread toasting" instructions in case you might not want to...you know...toast two pieces of bread at the same time. And I quote, "Single bread operation may cause uneven toasting result due to nonuniform heat distribution from the empty slot."  So, I am getting a toaster, a grammatical mistake, and entertainment all for the price of a toaster. But wait, there's more. It gets better! And here is the tie-in with our business: It shows actual, color photographs of pieces of toast corresponding to the level dial on the toaster, ranging from level 1 (lightly toasted) to level 6 (call the fire department). So, they are asking you to compare the color photos with your toast. I love this! Examine and compare. This is risk mitigation at its absolute finest.  So when was the last time you examined, with a clear head, your F&I practices? When was the last time you (or a trained third party) compared a checklist to a deal folder for compliance? Are your deals "warm and toasty?" Or, do you need to call the Fire Department to hose them down?   If your dealership strives toward a better culture of compliance, consider this checklist when reviewing your F&I practices:  This is a partial list representing only twenty (20%) percent of the items that you should be checking.   Examining these practices will help prevent so many problems and allegations, including (but not limited to) product stuffing (quoting a payment that includes aftermarket products), discrimination, income manipulation, Suspicious Activity Reports, and fraud. Some of the items above are just the law, and you are required to comply.   Financial institutions are required to file Suspicious Activity Reports if they believe you have submitted false information to them. It is a requirement for them, not an option.  Some of these items may be obvious, but are you actually checking? Or have you hired a third party to check? If a regulator walked into your dealership, could you demonstrate that you perform periodic audits to check your F&I department? Did you know that Section 8 2. of the United States Sentencing Commission considers compliance activity when judges determine the length of jail time? You must "(1) exercise due diligence to prevent and detect criminal conduct; and (2) otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law." It is worth noting, the Consumer Financial Protection Bureau (CFPB) recently announced they are hiring additional lawyers for compliance enforcement.   Don't wait until smoke is rising and alarms are blaring. Implement a compliance program now, or you will be a level 6 piece of toast.  

Want a Raise? Your raise will become effective when you do. Are you the most effective business manager you can be? Have you tweaked every detail in your process to perfection? I have a tip for you - $4 000 is the new $3 987. Do you want to make an incremental difference in your production and income by making a minimal change? Pay attention to the details of your current pricing strategy in your F&I office in regards to your product prices. Odd-Even Pricing We have all heard the term, "it's a numbers game," right? Well, in sales, it is about the numbers! Typically, we talk about how many ups, or "at-bats" you've had. What your penetration rate was, and so on. This month, I am sharing the concept of odd-even pricing with you. I didn't create this, but I have used this for years, and it helps me move the needle month in and month out. If utilized well, this is a tool that can fit in your holster and effectively allow you to hold more gross profit on every transaction to do. This psychological pricing tactic plays into a customer's psyche. Utilizing this strategy in your dealership will encourage more impulsive purchases that are also larger in size. Odd numbers or oddball numbers in pricing can be a very effective strategy or tool to bring more believability that the very best price was given. It deters a consumer from seeking a lower price as opposed to even number pricing. The perception of the deal is that the dealership has wrung out the excess margin, and therefore they got it down to the last penny. The perceived value is higher than the oddball price suggests, which encourages buying and paying a profit. I am suggesting that when pricing products just under a whole number, for example, a vehicle service contract (VSC), instead of $4,000, price it at $3,987 – it makes it seem like a bargain. I like using a number that also, for the most part is descending. What I mean by this is after the first number, the rest get smaller as you read it. The customer typically focuses their attention to the first number anyway. So rather than price a VSC at $4,000, start it with a 3 and follow it with 987, not 999. This oddball pricing suggests they are getting a "value price" or a "bargain" as opposed to the whole number pricing, which will encourage them to take advantage and enroll in whatever program you are selling. Optimizing the Consumers' Perception Since most consumers see the oddball price as a bargain, you should use that perception and play that into your F&I products' pricing strategy. Since we want our customers to view our products as a good value, this strategy just makes good sense. We can't control a lot of things in the world or even in each deal. I encourage you to let go of the water cooler talk about things like china, bitcoin, the elections, the dow, tax rates, politics, interest rates, and oil prices. Start focusing on what you can do to make an immediate change in your production. Remember that we all get the same amount of time each day, 24 hours. It is what we do with the time we have the determines how we live. If you're going to take the swing, why not increase the likelihood it making contact and completing the sale. The numbers you use will help drive the sales. Try this for 30 days and see for yourself. I wish you the best during the last half of this year, and I genuinely hope this tip makes you and your store some additional profits now and in the future! Go forth and profit!

Whether you’re launching a new F&I product, a new bundled package or want to increase the penetration of products you’ve displayed on your menu for some time, developing a detailed plan for success never goes out of style. What will make your five-step plan more fruitful is how it will give your sales and F&I teams tools for planting the seed of desire in prospects for your aftermarket products. They’ll be seed-planters way earlier in the deal process than ever before, almost the moment a consumer enters the showroom or takes a phone up or internet lead. With this plan, your team creates interest first and then value in the F&I products you offer, in atypical ways. Ordinarily, the F&I product discussion starts at the back end of the deal. Getting to that point took time – and now you want to push the consumer’s patience by presenting more “things” for them to buy? No wonder so many car-buyers feel at this point like you’re asking them to gild the lily – to add on, in their eyes, unnecessary supposed improvement.  However, by starting the product sales process before the customer steps foot into F&I is a gentler and more convincing way to encourage F&I product purchases. For example, plant seeds at trade evaluation. As you discuss their trade, merely ask if they’d the vehicle protected by a service agreement or whether prepaid maintenance helped perform routine maintenance.  Your goal is to create a curiosity in the customer’s mind, “Why didn’t I get that? Maybe I should on this new vehicle.” Similarly, at lease termination and drop off, the question, “Did you have wear and tear insurance on this vehicle?” sets up the same line of thinking. The question confirms for the lessee who does that their earlier at the time of the original lease was wise because it now pays for the dings and dents in the vehicle at turn-in. For lessees who did not buy this coverage initially, the question seeds a suggestion that lease wear and tear coverage would be worth considering with their new lease. Bundled packages sell well when using this approach when handled by trained sales or F&I professionals sharing product details and customer benefits as they move the prospect from trade evaluation to the first pencil. Here is the point of building value into these products. For instance, a customer purchasing bundled lease wear and tear, prepaid maintenance, is assured their routine maintenances are covered (as required by their lease agreement) as are repairs for glass breakage, minor dents, paint chips and tire and wheel damage - throughout the lease. That’s a story many lessees will find appealing, as many multi-benefit bundles allow repair of cosmetic blemishes whenever they occur, not just at lease end. Thus, lessees continue to drive like-new vehicles throughout the lease, not ones showing road rash and gravel chips. Preemptive selling like this doesn’t happen unless you plan for it to happen – and have trained and otherwise equipped staff to execute these actions with polish and confidence. Delivering results like this requires you to have committed plan goals and guidelines to paper – and sharing the plan’s big picture and practical steps for invigorating product sales.  Here is that better five-step plan to product sales success: Step One – Establish your goals for penetration and gross profit levels. Use a worksheet to analyze the number of presentations to be done and the closing ratio for driving the goals you set. Step Two – Set product pricing and markup required to improve gross per contract Step Three – Develop a business manager outline discussing points in your process to be enhanced and an outline for delivering training needs – and benchmarking performance against goals. This step is preliminary to your Official F&I Training Manual. Step Four – Create your outline for how the sales team will contribute. In this step, you create talking-point guidelines for presenting products at many points during your customer engagement, including trade evaluation, first pencil or presentation of customer’s purchasing options, during rate and term questions, and during issues arising from the first pencil. Step Five – The above builds on this step, mandatory training for F&I and sales teams, including training proficiency evaluation and relearning and establishing a culture of importance for this process.  You’ll notice one critical step I’ve left of here, your pay plan. You will want to work yours out based on the product goals and margin you set in Step One – and that will be different for every dealership. The five steps here, however, translate across any dealership, size and brand. Customers complain the F&I process is too long, and while F&I menu presentation and transaction technologies have shortened this phase of buying a car, if you put into action this plan customers will enter F&I already considering the seeds of value you planted with them earlier in the sales cycle. Your execution and reinforcement of the content of Step Five are foundational to the success of an F&I product launch. If you’re not committed to your launch plan, no one else will be. Therefore, get behind building an F&I product sales culture that escalates the value of this effort, its urgency, and the practice necessary to prepare, equip and hone your sales and F&I teams’ attitude and desire for success.

vAuto Founder Dale Pollak recently told a group of dealers: “We’re not in the car business, we’re in the business of making money.”  And he’s right. One of the biggest influencers on new car dealers’ profitability in 2019 has been the health of their new vehicle inventory. In the latest Haig report, it was highlighted that franchise dealer expenses are growing faster than grosses, with new car holding expenses identified as the primary culprit for this trend.  It’s hard to fathom that in 2015 (per NADA Dealership Financial Profile ), the average dealer booked nearly $110,000 in floorplan profit and in 2019, floorplan will be a $93,000 hit to the bottom line. That’s a $203,000 swing in the wrong direction. Using NADA’s guideline that dealers make approximately 2% net profit on every $100 worth of sales, dealers will need to find an additional $11,000,000 in sales revenue to make up that net profit difference.  Most dealers I meet with don’t have many $11,000,000 ideas lying around, so increased attention to managing new vehicle inventories has become increasingly urgent. One of the biggest challenges in monitoring this aspect of the dealership’s operation is that the industry lacks good inventory measurement targets or benchmarks. NADA’s Dealership Performance Benchmarks Guide provides ONE recommendation for new vehicle inventory control: maintain a 45-60 days’ supply. It’s interesting that parts managers have more inventory performance benchmarks and spend a lot more time analyzing their $400,000 parts inventory than a new car manager does for his $8,000,000 new car inventory. If “making more money” really is the name of the game, dealers will be wealthier and wiser by managing these two critically important new vehicle inventory metrics. % Inventory Under 90 Days Maintaining a high % of units under 90 days is vital for three reasons: 1. Mitigates exposure to rising holding costs, because in most cases the factory floorplan credit covers the first 90-120 days. 2. Dealers with fresh inventories are typically those with higher retail sales turn, which means more trades, more recon, more F&I and more floorplan profit! 3. Grosses are BETTER! In a recent analysis Dealertrack conducted with 400,000 sales transactions, retailed units with 0-30 days in stock had an average front-end gross (transaction price vs. invoice, not including F&I, factory bonus or doc fee) of -$230, while retailed units with an age of 90-120 days in stock were -$750 and units over 365 days were -$1,690!! I don’t think many dealers realize the extent to which they pay a holding cost premium for worse grosses!! Performance Targets Domestic Stores 70% under 90 days Import/Luxury Stores 80% under 90 days Dealer Days’ Supply by Model/Trim Monitoring the relationship between your dealer days’ supply and the overall market days’ supply allows managers to quickly identify model lines and trims where their pricing strategy, mix or online merchandising is off. Most OEMs only provide the individual dealer days’ supply with no comparison to the overall market. This would be like analyzing your stock portfolio performance without having the S&P as a benchmark. The devil is usually in the details, and this is certainly the case when it comes to the enormous complexity of most model/trim/option/color combinations. The overall dealer days’ supply at the model line level might look fine, but when you drill deeper into the trim mix, that’s where you’ll often find the problems. I recently saw a dealer with a 45 days’ supply of 2020 Camrys, but a 223 days’ supply of red Camry LEs. The sooner dealers become aware of issues like these red Camry LEs, the sooner they can begin taking corrective actions to reduce their exposure to holding costs. This granular vision of your inventory will also highlight stocking opportunities of combinations performing well in the market, which are not currently in your stock.  Making More Money with Better Inventory Control Making money for franchise dealers has become a lot more challenging over the last eight years, as return on sales has fallen from 2.8% in 2011 to 2.3% this year (per NADA). The major underlying cost structures are not likely to improve – rent factors/mortgages are not becoming less expensive, attracting and retaining talented employees is not getting cheaper and advertisers are not looking to charge less. New car inventory control remains one of the single biggest opportunities for dealers to root out unnecessary expenses and drive incremental sales.  Dealers who are managing their inventories with a high % of units under 90 days and monitoring the dealer days’ supply by model/trim will be well-positioned to improve the health of their new vehicle inventories and the health of their bottom lines. Remember, “We’re not in the car business, we’re in the business of making money.”