In my opinion, the standard Profit and Loss format in use in our industry is confusing and has some serious short comings in regards to profitability in the parts department. My complaint is that it is too narrow of a view to give you all the data you need to really know how your parts department is performing. Isn’t profit truly defined by the money we make on the money we invest? If that is true, the problem comes with the simple fact that we deal with hundreds, even thousands of individual investments each month. Of course the majority of these investments pay off and are represented in the P&L. Unfortunately, the ones that do not pay off for what ever reason (ordered wrong year, model, part, etc.) are never included in the P&L. These “bad investments” are simply moved to the Balance Sheet as a asset at full value. That would be fine if we were guaranteed to sell it in a timely manner. The nature of DustyMoto has proven that many of these “bad investments” indeed never sell, to the tune of hundreds of thousands of invested dollars being lost to the dreaded “no sale” segment of inventory.
Let’s look at it a little differently: You have 100k you want to invest so you spend it all to buy an apple orchard. No buildings, equipment, no improvements, just trees and land. On your first harvest of the season you make 30k. So, did you make a profit? How do you view it? Of course you can get fancy, you can say you want to make 10% on your investment of 100k, and the rest is profit so you made 20k profit and 10k recapitalization. You can say view it as you are 30k closer to breaking even, only 70k more to go, then you can start making some real money. Regardless of how you look at it, the facts are you had 100k in cash, now you have 30k in cash and an orchard.
Now scenario 2: Instead of buying the orchard, you buy a truck load of apples from the orchard. You buy 100k apples for 1.00 each and you plan on selling them of 1.50 each making a full .50 profit on each one. The first week you sell half of them at full price and bring in a whopping 75k. So your P&L shows you: SALES 75k, COGS 50k. PROFIT 25k and your Balance sheet shows that you have 50k in inventory still to sell. But you know your inventory has a shelf life and will soon go bad so you take action, you drop your price to your cost of 1.00 and you sell 35k the next week. Your P&L now shows you: SALES 110k, COGS 85k. PROFIT 25k and your Balance sheet shows that you have 15k in inventory still to sell. Now, all you have to do now is sell the remaining 15k of rotten apples you have. Easier said than done, right? Your P&L is telling you that you made 25k in profit, but your bank account is telling you something completely different. Which one is right?
Which of these two scenarios do you think best mirrors your business model for your parts department? Do you look at your inventory as a true asset or do you view it like our apples with a certain shelf life? If you are a large Internet parts operator you most likely view your parts as a true asset, where as a dealer serving only their local market may hold to the shelf life principle.
I am going to do a series around the second view of your inventory having a shelf life. If this is interesting to you and you want to subscribe to the series, simply enter your email address and click the button:
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This will give you some extra content and view points and will allow you to give your input if you so desire. As always your email will be held in confidence, we don’t share or sell them. And just so we are clear, this is FREE, I’m not going to try to up sell you later. Join in….it is going to be an interesting journey!
Bobby Franklin CEO,
DustyMoto
twitter: @dustymoto
