The Nuts and Bolts of Forecasting

As 2018 turned into 2019, your business was where it was.
It’s too late to do anything about what happened last year.
In another year, as December 2019 turns to January 2020, will you be where you want to be? Do you even know where you want to be at this time next year?
Or as long as the lights stay on at the dealership, that’s good enough for you?
The start of a new year is a natural time to take a big-picture, long-term look at your independent dealership.
By making a plan for the coming year – setting goals, making a budget and forecasting revenue, expenses and profit – dealers can take better control of their business.
Not every dealership goes through a forecasting process, of course, and those that don’t aren’t necessary unprofitable. But they probably aren’t being run the best they could be, with as much direction and strategic insight as possible.
“You have to have some sort of understanding of where you’re going,” said Jon Paul Davis, a partner with Tennessee-based HHM Certified Public Accountants. “Without a budget or without a goal of where you’re going, at best you’re just maintaining.”
Forecasting, goal-setting and budgeting are all about numbers and spreadsheets, but putting the numbers in ink at the start of the year comprises only part of the forecasting process.
For a dealer to benefit from a forecast, industry experts said, he or she needs to continually monitor how the business is doing compared to the forecast and adjust tactics as necessary.
That isn’t a Forecasting 101 task. It’s a Management 101 task.
It takes time to monitor how all the channels of the dealership are performing and how they fit into the forecast, and that oversight comes down to time management, not forecasting skills, said NIADA Dealer 20 Groups moderator Justin Osburn, author of Used Car Dealer’s Retail Ready series and instructor of NIADA’s Certified Master Dealer course.
“Dealers who are hitting their objectives and are growing by 20 percent net year over year,” Osburn said, “are dealers who have that kind of focus and that kind of time management.”

GETTING STARTED
HHM’s Davis tells his clients there’s a difference between a forecast and a budget, and frames it this way.
A forecast, he said, is a sound guess, based on available performance data and probably some optimism, about what the dealership can accomplish. A budget, meanwhile, is more a look at the minimum a dealership needs to accomplish to stay in business.
“Both are useful and both have the same types of underlying assumptions,” Davis said. “But one might be used for a little bit different purpose.”
He said a forecast might be called for to show a bank or a potential partner, while a budget could be used internally.
Experts agree dealers should involve their managers or department heads in the budgeting process. But exactly when that involvement happens is up to the dealer.
Osburn recommended dealers consult with their controller, CPA or similar adviser to analyze the profit and loss numbers from the previous year for the dealership’s various departments.
From there, the dealer can come up with projections of revenue, expenses and profit for each department and present those projections to the managers. The managers are then charged with devising a plan to hit the dealer’s projections – or, if they think the dealer’s numbers are inaccurate, they can submit their own projections.
Sales trainer Paul Webb, founder and chief operating officer of Paul Webb Training LLC, prefers what he calls a “top down, bottom up, top down” forecasting process.
That begins with asking each department head, “What can you do with this amount of resources in this amount of time?” and requesting an answer by a specific time.
After receiving the department head’s numbers, the dealer evaluates them and fine-tunes them as required.
After any necessary back-and-forth, both sides come to an agreement on the numbers.
A dealer wants buy-in from department heads when it comes to forecasting, Osburn and Webb emphasized, because they are the ones who will be responsible for meeting the numbers.
A forecast in which projections are dictated to a department head from above is far less likely to be effective.
“The more ‘telling’ you do, usually the worse the results,” Osburn said. “It’s better to get them included in this process.”
When it comes to determining the numbers to use in a forecast, data is king.
Look at the previous year’s revenue and expense information, and the data from several other years before that, to get a sense of trends and what to expect in the coming year. Drill down into monthly numbers so seasonal variations can be taken into account.
“We’d like to be in a growth pattern,” Eddie Caudle, owner of Oxford Car and Truck in Oxford, N.C., said, explaining how he analyzes past performance data. “But if nothing else we’d like to stock what we did in the last year and sell as much as we did in the last year in the same month.”
Buy Here-Pay Here dealerships have other concerns, Davis said, because of their traditionally higher-risk customer base and the nature of their sales.
“You can’t expect that you’ll receive 100 percent of the income on 100 percent of the sales,” Davis said. “You’re going to have some repossessions. You’re going to have some claims.”
Particularly for BHPH dealers relatively new to the industry, Davis recommended consulting industry benchmarks, such as those provided annually by the National Alliance of Buy Here-Pay Here Dealers, or a valuation expert in conjunction with forecasting.
In fact, being aware of industry developments and macroeconomic trends is important for all dealers.
Dealers should know which direction interest rates are likely headed and what that means, both for their expenses and for their customers’ ability to buy vehicles.
Dealers should check the J.D. Power valuation service at www.nada.com/
B2B to know where wholesale prices are headed and what types of vehicles are most popular.
For example, trucks are currently projected to make up 70 percent of the market, continuing a steady rise from the 40 percent mark, according to Larry Dixon of the J.D. Power valuation services division.
“If you can get more benchmarking data from different sources it can help you come up with a better forecast,” Davis explained.

DON’T SET IT AND FORGET IT
Once the forecast is crafted, the hard work begins. And that hard work has very little to do with hard numbers.
But it’s the hard work that produces results.
Every day, Osburn said, a dealer should check in with his managers to learn how the dealership did the day before – not out of a sense of micromanagement or paranoia, but to ensure accountability, to stay aware of how the performance fit into the forecast and to provide encouragement and feedback.
The department heads should be doing most of the talking at those daily check-ins, Osburn said, reporting on, “This is what we did yesterday. This is where we fell short. This is where we were strong. This is what I want to improve today.”
At weekly management meetings, Osburn said, department heads can explain – particularly in context with the forecast – what they have accomplished and what challenges their departments have faced.
Keeping peers and superiors informed about a department’s hurdles and enlisting their assistance in devising ideas to tackle problems can produce more effective solutions.
“That’s been a help for us, to have those weekly conversations,” Caudle said.“ ‘What’s our objective for this week? Which cars do we need to make go away? Which deals do we need to get funded?’ ”
The common thread in the daily contact and weekly and monthly management meetings is time.
If a dealer doesn’t budget time to check in with his department heads and to hold weekly and monthly meetings, Osburn said, he is less likely to be aware of issues that can derail a business from meeting its objectives. And that means he’s less likely to maximize his dealership’s success.
Osburn said the return on the investment of that time on the front end can be fewer surprises and fewer “fires” that need to be “put out” immediately. Daily check-ins mean the dealer stays well-informed and can make sure issues needing quick action receive it.
“I’m a big believer that hitting objectives, hitting forecasts, really comes through time management,” Osburn said.
Too many well-intended dealers, he added, don’t understand that component of the forecasting cycle.
“You don’t know what you don’t know,” Osburn said. “I don’t think [those dealers] have ever experienced or been around a dealership that is well-structured and does it that way.
“It’s not because they’re lazy – they certainly work 16 hours a day – they just don’t know that it takes that daily management and leadership.”
Information from the daily check-ins and weekly management meetings bubbles up to the forecast and helps make that document a living, breathing entity.
For example, if it’s clear a dealership will surpass its sales goal for a given month and put the company ahead of its year-to- date forecast, perhaps money allocated for sales marketing in the next month can be reallocated to another purpose.
Or if sales are lagging behind the forecasts, the dealership could invest in a tent-pole sales event or giveaway that has been profitable in previous years.

NOT A MAGIC SOLUTION
Even the best forecast, updated regularly and used to guide business decisions, won’t guarantee success.
As CPA Davis said, a dealership still has to sell cars at a profit, and no forecast can guarantee it will be able to do that.
But a forecast, properly prepared, monitored and updated, can certainly guide business decisions that can contribute to profitability.
“A lot of car dealers go out and buy vehicles because they have the money to do it or because they have floor- plan availability,” Caudle said. “It really should be based off what your forecast is. Obviously, if you’re not selling cars, you don’t need to be buying cars.”
Osburn said his sense is that many dealers don’t go through a forecasting exercise. And of those who do, he said, few understand what’s needed to complement the forecast – a structure to rely on managers to work toward the objectives and to provide a steady flow of information to keep abreast of developments.
“If they were exposed and had some good practical experience and knowledge,” Osburn said, “most of them would do it.”