This indicator measures if the marginal contributions from the Parts and Service departments are sufficient to cover the dealership’s total fixed expenses. The goal of this metric is to see if the dealership can cover its total fixed costs with parts and service sales only.
At the second level, you can see the composition of this KPI, how the marginal contribution is achieved, and the total fixed costs. You can analyze Parts and Service information separately. Although the indicator is calculated based on the balances of the past 12 months, a monthly line graph is displayed to detect variations. In the example, for August 2022 a value of 140.02% was recorded, which seems unusually high. The accounting analyst can review this situation to confirm the value or identify input errors that may affect subsequent months.
If necessary, at the third level, the accounting analyst can delve further into the accounts that make up the indicator to validate groupings and postings. For example, in sales, drilling down allows you to see the details of the accounts considered as sales. The same can be done with each group of costs and expenses.
Which dashboard is this KPI on?
Managers
What department does it affect?
This KPI affects the entire dealership and is mostly used by the CEO and the Aftersales Manager. The KPI can broken down by Parts and Service departments. It does not include vehicle sales.
Measurement frequency
Monthly, using the values of the last 12 months to calculate an average.
Target
The OEM may set the dealership´s objectives; some OEMs require Parts to cover 80% of fixed expenses, with the rest to be covered by Services. Other OEMs require the dealership to not only cover fixed costs, but to also generate a profit, for example, they may require Parts to cover 80% and Service 40%, totaling 120%.
What happens if it is green?
If the dealership’s Absorption Rate is in the green, it means that the profit from Parts and Service is covering the company’s fixed costs. If this happens, vehicle sales will directly contribute to company profit since its margins are not needed to cover fixed costs.
What happens if it is red?
Falling below the target indicates that Parts and Service did not generate enough profit to cover fixed costs. This means the dealership cannot sustain itself solely on after-sales revenue.
Improvement strategies
The Absorption Rate is a consequence of sales, costs, and expenses. If sales increase while maintaining the relationship between variable costs and expenses, more money will be generated to cover the dealership’s fixed costs.
Strategies should focus on increasing revenue and improving the efficiency of the Service Department:
- If technicians complete repairs faster (through training, proper tools, and the right time measurement tools), the department’s profitability will increase.
- If the Parts department schedules purchases, it can avoid emergency purchases and increase margins.
- Controlling the discount policy will lead to higher profits.
- If manufacturer incentives for parts purchases are achieved, their cost will be lower and profits will be higher.
Relationship with other indicators
The Absorption Rate is linked to Sales, as it generates the marginal contribution needed to cover fixed expenses. It is also connected to the Breakeven Point because both indicators aim to show whether the dealership generates enough revenue to cover fixed expenses. If the Absorption Rate meets its target, the Breakeven Point will also be achieved, leading to the understanding that vehicle sales profit will be net profit since fixed expenses have been covered by aftersales revenue.
Fórmula
Marginal Contribution (per department) / (Fixed Expenses + (Financial Results – Outflows))
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