What is a service absorption For auto-finance or in general?

Answer 1

Probably the least known or most misunderstood of any calculation on the auto Dealer's financial statement is the percentage of service absorption. And, conversely, it is one of the most important. Because, with a high service absorption, and here I am talking about exceeding 100%, this gives the dealership an opportunity to sell more vehicles - new and used - at a lower price than his competitors. Service absorption is the percentage that the Parts, Service and Body Shop operating gross covers of the total of all of their own combined department operating expenses PLUS the total of fixed expenses and dealer salary. Let me repeat that statement. When a dealership parts, service and body shop operation develops enough gross to cover their own individual department operating expenses, plus the total fixed expenses and dealer salary, then that dealership has the opportunity of a lifetime. Why? That is because the new and used car department can now sell merchandise at a greater discount because all they have to cover is their own department expenses - AND - generate an operating profit from same. Let's look at it another way. The operating statement is broken up into many selling categories. Think of an auto dealership as a very large umbrella. Each panel is a department. Those departments are the following - New Cars and Truck retail, New Car and Truck fleet, Used Cars & Trucks retail, Used Car & Truck Wholesale, New & Used Finance Sales Income, Parts Department, Service Department, and Body Shop Operation, Fixed Expenses and Dealer Salary. Then there is the Rental Car and other income section of the statement. Sounds like a lot to look at, and analyze - well, it is. However, we are going to concentrate on just the Parts, Service & Body Shop income and expenses along with the Fixed Expense and Dealer Salary. No other information will be required for this calculation. Again, the objective is to attain a minimum of 80% Service Absorption and to build this percentage to the goal of 100%, and then try to exceed that. Just think of the value this would add to your dealership if you were in the market to sell same. Wow! How high is up? Let's get the calculation out of the way first, before we talk about increasing operation numbers in each department. 1st - List the $ of gross profit per department - Parts Department ______________________ Service Department ______________________ Body Shop ______________________ Total Gross $=================== 2nd - List the total $ of operating expense per each of these departments - Parts Department $______________________ Service Department ______________________ Body Shop ______________________ Fixed Expenses ______________________ Dealers Salary ______________________ Total of these expenses $_____________________ 3rd - Divide the total of 1st category (Gross) by the total of 2nd category (Expenses) to give you the Service Absorption % Service Absorption _____________________% The absolute least % you should accept is 80%. There are many dealers with a Service Absorption percentage consistently well over 100%. The majority of dealers numbers that I have seen are between 45% and 80%. THOUGHTS FOR YOUR FUTURE USE: This particular Dealer did not pay attention to his parts WIP inventory. The obvious problem was called to his attention but not acted upon. However, one of his employees also saw the problem, pulled up the RO's and called this to the Dealers attention. The missing RO's had been found. They had been filed away by someone in the service dept without being completed - W&P claims not filed with the factory. Did dealer ever look at WIP - Parts detail run? Did dealer look at outstanding RO list? All of you should take a look at these lists prepared for you each and every month? One thing that is obvious is the relationship of outstanding RO's on WIP - Parts list to number of stalls in dealership. If you have 22 Service and 13 Body Shop stalls available. Why would you have 335 RO's outstanding on WIP - 96 for Body Shop and 239 for Service Dept. These numbers were called to the dealer's attention. It is your - The Dealer's - responsibility to look at outstanding or missing RO list. What was discovered was that the parts department was ordering - and costing - parts for cars that had not come into the shop - just people who said they would be in at some future date for service or body repairs. The prospective customer provided a copy of an insurance estimate to the Body Shop Manager and left. Did not return to have the repairs completed. Ladies and Gentlemen - this is a very good example of someone not paying attention to the vast amount of information on their financial statement or from their accounting records. How about you? Are you paying attention? By Fred Samuelson Reprint by permission from Dealer Magazine