23 data to include in the business plan of your car dealership business

This article was written by our expert who is surveying the industry and constantly updating the business plan for a car dealership business.

Our business plan for a car dealership business will help you build a profitable project

Ever pondered what the ideal inventory turnover ratio should be to ensure your car dealership remains profitable?

Or how many vehicles need to be sold each month to meet your revenue goals and maintain a competitive edge?

And do you know the optimal gross profit margin for a successful car dealership?

These aren’t just trivial figures; they’re the metrics that can determine the success or failure of your business.

If you’re crafting a business plan, investors and financial institutions will scrutinize these numbers to gauge your strategy and potential for success.

In this article, we’ll explore 23 critical data points every car dealership business plan must include to demonstrate your readiness and capability to thrive.

A successful car dealership should aim for a gross profit margin of 20-25% on new vehicles and 30-35% on used vehicles

A successful car dealership should aim for a gross profit margin of 20-25% on new vehicles and 30-35% on used vehicles because these margins help ensure the dealership remains profitable while staying competitive in the market.

New vehicles typically have lower profit margins due to manufacturer pricing constraints and higher competition among dealerships, which means a 20-25% margin is realistic and sustainable. On the other hand, used vehicles allow for higher margins of 30-35% because dealerships have more flexibility in pricing, often acquiring these vehicles at lower costs and adding value through reconditioning.

These target margins can vary based on factors such as location, market demand, and the dealership's specific business model.

For instance, a dealership in a high-demand urban area might achieve higher margins due to increased foot traffic and a larger customer base. Conversely, a dealership in a rural area might need to adjust its margins to attract customers who have more limited options and may be more price-sensitive.

Finance and insurance (F&I) products can contribute 25-30% of a dealership's total gross profit

Finance and insurance (F&I) products can contribute 25-30% of a dealership's total gross profit because they offer high-margin opportunities beyond the sale of the vehicle itself.

When a customer buys a car, the dealership can offer various F&I products like extended warranties, gap insurance, and maintenance plans, which often have higher profit margins than the vehicles. These products are attractive to customers because they provide added security and peace of mind, making them more willing to invest in them.

Additionally, dealerships often have partnerships with financial institutions, allowing them to earn commissions on loan origination and other financial services.

The contribution of F&I products to a dealership's profit can vary based on factors like the dealership's location, the types of vehicles sold, and the demographics of the customer base. For instance, luxury car dealerships might see a higher percentage of profit from F&I products due to the higher value of the vehicles and the customers' willingness to invest in premium services.

Dealerships should maintain a sales-to-service ratio of 1:1 to ensure steady service department revenue

Maintaining a sales-to-service ratio of 1:1 is crucial for car dealerships to ensure a steady flow of revenue into their service departments.

When a dealership sells a car, it creates a potential long-term customer for its service department, which can lead to consistent revenue from maintenance and repairs. A balanced ratio means that for every car sold, there is an opportunity to bring that customer back for service, creating a reliable income stream.

This balance helps dealerships avoid over-reliance on either sales or service, which can be risky if market conditions change.

However, this ratio can vary depending on specific factors such as the type of vehicles sold and the dealership's location. For instance, luxury car dealerships might see a higher service-to-sales ratio due to the complexity and cost of maintaining high-end vehicles, while dealerships in areas with a high density of older cars might see more service business relative to sales.

Inventory turnover for new cars should ideally be 60-90 days, while used cars should turn every 45-60 days

Inventory turnover for new cars should ideally be 60-90 days, while used cars should turn every 45-60 days because of the different dynamics in demand and depreciation.

New cars often have a longer shelf life due to their higher price point and the time it takes for customers to make a purchasing decision. In contrast, used cars are generally more affordable and in higher demand, which means they should sell faster to avoid depreciation losses.

Additionally, new cars have a slower depreciation rate compared to used cars, allowing dealerships to hold onto them a bit longer without significant loss in value.

However, these timeframes can vary based on factors such as market conditions and geographic location. For instance, a dealership in a high-demand urban area might experience faster turnover rates, while one in a rural area might see slower sales cycles.

Dealerships should allocate 1-2% of total revenue for facility maintenance and upgrades annually

Dealerships should allocate 1-2% of total revenue for facility maintenance and upgrades annually to ensure their premises remain appealing and functional.

Regular maintenance helps prevent unexpected repair costs that can disrupt operations, while upgrades can enhance the customer experience, potentially boosting sales. By investing in their facilities, dealerships can maintain a competitive edge in attracting and retaining customers.

However, the exact percentage may vary depending on factors such as the age of the facility and the dealership's location.

For instance, older buildings might require a higher percentage for maintenance due to wear and tear, while dealerships in high-traffic areas might need more frequent upgrades to stay competitive. Ultimately, the key is to balance maintaining a welcoming environment with managing costs effectively.

Advertising expenses should not exceed 7-10% of total revenue to maintain profitability

In the car dealership business, it's generally advised that advertising expenses should not exceed 7-10% of total revenue to maintain profitability.

This guideline helps ensure that a dealership is not overspending on marketing at the expense of other critical areas like inventory management and customer service. By keeping advertising costs within this range, dealerships can allocate more resources to areas that directly impact customer satisfaction and retention.

However, this percentage can vary depending on specific factors such as the dealership's location, target market, and competition.

For instance, a dealership in a highly competitive urban area might need to spend more on advertising to stand out, while one in a less competitive rural area might get by with less. Ultimately, the key is to find a balance that maximizes return on investment without compromising other essential business functions.

Successful dealerships often achieve a closing ratio of 20-25% for walk-in customers

Successful dealerships often achieve a closing ratio of 20-25% for walk-in customers because they have honed their sales processes to effectively convert interest into sales.

Walk-in customers are typically more serious about purchasing, as they have taken the time to visit the dealership in person, which indicates a higher level of purchase intent. Additionally, these dealerships often have well-trained sales teams who are skilled at building rapport and addressing customer needs, which helps in closing sales more efficiently.

However, this closing ratio can vary depending on factors such as the dealership's location, the types of vehicles they offer, and the overall market conditions.

For instance, a dealership located in a high-traffic area with a diverse inventory might see a higher closing ratio due to increased foot traffic and varied customer preferences. Conversely, a dealership in a less populated area or one that specializes in niche vehicles might experience a lower closing ratio, as they rely more on targeted marketing and specific customer interests.

Service department labor costs should stay below 50% of service revenue for optimal profitability

In a car dealership business, keeping service department labor costs below 50% of service revenue is crucial for maintaining optimal profitability.

When labor costs exceed this threshold, it can significantly erode profit margins, making it difficult for the dealership to cover other operational expenses and invest in growth. By maintaining labor costs at or below 50%, the dealership ensures that a larger portion of revenue is available for reinvestment and expansion.

This balance allows the dealership to remain competitive while still providing quality service to customers.

However, this percentage can vary depending on specific factors such as the location of the dealership and the complexity of services offered. For instance, dealerships in high-cost areas might have slightly higher labor costs, while those offering specialized services may justify higher labor expenses due to the expertise required.

Parts department should aim for a gross profit margin of 40-50%

The parts department in a car dealership should aim for a gross profit margin of 40-50% because it ensures a healthy balance between profitability and competitive pricing.

Achieving this margin allows the dealership to cover its operational costs, such as salaries and inventory management, while still making a profit. Additionally, it provides a buffer to accommodate market fluctuations and unexpected expenses, ensuring the business remains sustainable.

However, this target can vary depending on factors like the type of parts being sold and the dealership's location.

For instance, high-demand parts or those with limited availability might allow for a higher margin, while more common parts may require a lower margin to stay competitive. Ultimately, the goal is to strike a balance that maximizes profitability without alienating customers or losing sales to competitors.

Dealerships should budget for a staff turnover rate of 40-50%, with high recruiting and training costs

Dealerships should budget for a staff turnover rate of 40-50% because the automotive sales industry is known for its high employee turnover.

One reason for this is the high-pressure sales environment, which can lead to burnout and dissatisfaction among employees. Additionally, the commission-based pay structure often results in income instability, causing many salespeople to seek more stable employment opportunities.

As a result, dealerships face high recruiting and training costs to continuously replace departing staff.

However, this turnover rate can vary depending on factors such as location and dealership size. For instance, larger dealerships in urban areas might experience higher turnover due to increased competition, while smaller, family-owned dealerships in rural areas might enjoy more employee loyalty and stability.

Effective upselling in the service department can increase average repair order value by 15-20%

Effective upselling in the service department can significantly boost the average repair order value by 15-20% because it encourages customers to purchase additional services or products that enhance their vehicle's performance or longevity.

When a service advisor identifies and communicates the benefits of additional services, such as a tire rotation or engine flush, customers are more likely to see the value in these offerings. This not only increases the immediate revenue from a single visit but also builds customer trust and loyalty, as they feel their vehicle is being well cared for.

However, the effectiveness of upselling can vary depending on factors such as the customer's budget, the age of the vehicle, and the customer's previous experiences with the dealership.

For instance, a customer with a newer vehicle might be more receptive to preventative maintenance upsells, while someone with an older car might prioritize essential repairs over additional services. Additionally, customers who have had positive past experiences with the dealership are more likely to trust the service advisor's recommendations, making them more open to upselling opportunities.

A dealership's rent or mortgage should not exceed 10-12% of total revenue to avoid financial strain

A dealership's rent or mortgage should ideally not exceed 10-12% of total revenue to prevent financial strain.

This guideline helps ensure that a dealership maintains a healthy balance between its fixed costs and operational expenses. If rent or mortgage costs are too high, it can squeeze the dealership's ability to invest in inventory, marketing, and other crucial areas.

By keeping these costs within the recommended range, dealerships can better manage their cash flow and remain competitive.

However, this percentage can vary based on factors like location and the dealership's business model. For instance, a dealership in a high-demand urban area might have higher rent but also higher sales volume, allowing it to sustain a slightly higher percentage. Conversely, a rural dealership might need to keep rent costs lower due to a smaller customer base.

Dealerships should aim for a break-even point within 12-18 months of operation

Dealerships should aim for a break-even point within 12-18 months of operation because this timeframe allows them to establish a stable customer base and optimize their sales processes.

During this period, dealerships can refine their marketing strategies and build relationships with local customers, which are crucial for long-term success. Achieving break-even within this timeframe also helps in managing cash flow effectively and ensures that the business can sustain itself without relying heavily on external funding.

However, the break-even timeline can vary depending on factors such as the dealership's location, the types of vehicles sold, and the initial investment made.

For instance, a dealership in a high-demand urban area might reach break-even faster due to higher foot traffic and sales volume. Conversely, a dealership in a rural area or one that specializes in niche vehicles might take longer to achieve this milestone, as they may face lower sales volumes and need more time to build a loyal customer base.

Extended warranties and service contracts can increase F&I revenue by 10-15%

Extended warranties and service contracts can boost a car dealership's F&I revenue by 10-15% because they offer additional products that customers are willing to purchase for peace of mind.

These products provide long-term protection against unexpected repair costs, which is appealing to many buyers. As a result, dealerships can capitalize on this demand by offering these contracts as part of their sales strategy.

Moreover, the profit margins on these warranties and contracts are often higher than those on the vehicles themselves, making them a lucrative addition to the dealership's offerings.

The impact on revenue can vary depending on factors such as the dealership's location and the demographics of its customers. For instance, dealerships in areas with higher income levels might see a greater uptake of these products, while those in regions with more budget-conscious buyers might experience less impact.

Digital marketing should account for 20-30% of the total advertising budget, focusing on lead generation

Digital marketing should account for 20-30% of the total advertising budget in a car dealership business because it effectively targets potential customers who are actively searching for vehicles online.

By focusing on lead generation, dealerships can capture the interest of these potential buyers and nurture them through the sales funnel. This approach is crucial because most car buyers start their journey with online research, making digital channels a prime opportunity to engage them early.

However, the exact percentage of the budget allocated to digital marketing can vary based on factors such as the dealership's location, target audience, and competition.

For instance, a dealership in a highly competitive urban area might need to invest more in digital marketing to stand out, while one in a less competitive rural area might allocate less. Additionally, if a dealership's target audience is younger and more tech-savvy, a higher investment in digital marketing could be more effective in reaching them.

Dealerships should maintain a current ratio (assets to liabilities) of 1.5:1 for financial stability

Maintaining a current ratio of 1.5:1 is crucial for car dealerships to ensure they have enough liquid assets to cover their short-term liabilities.

This ratio indicates that for every dollar of liability, the dealership has $1.50 in assets, providing a buffer against unexpected expenses or downturns in sales. A higher ratio can indicate excessive liquidity, which might mean the dealership is not using its assets efficiently to generate revenue.

However, a lower ratio could signal potential financial distress, as the dealership might struggle to meet its obligations.

In specific cases, such as during a high sales season, a dealership might temporarily operate with a lower ratio due to increased inventory turnover. Conversely, during a slow sales period, maintaining a higher ratio could be beneficial to ensure stability and cover any unforeseen expenses.

Customer retention programs can increase repeat sales by 20-25% over five years

Customer retention programs can boost repeat sales by 20-25% over five years in a car dealership because they focus on building long-term relationships with customers.

By offering personalized services, such as exclusive maintenance packages or loyalty discounts, dealerships create a sense of value and appreciation for their customers. This encourages customers to return for future purchases, as they feel more connected and valued by the dealership.

Moreover, satisfied customers are more likely to recommend the dealership to friends and family, further increasing potential sales.

However, the effectiveness of these programs can vary depending on factors like location demographics and the quality of customer service provided. In areas with high competition, a well-executed retention program can be a significant differentiator, while in less competitive markets, the impact might be less pronounced.

Dealerships should aim for a customer satisfaction index (CSI) score above 90% to ensure repeat business

Dealerships should aim for a customer satisfaction index (CSI) score above 90% to ensure repeat business because a high CSI score is a strong indicator of customer loyalty and satisfaction.

When customers are satisfied, they are more likely to return for future purchases and recommend the dealership to others, which can significantly boost sales. A CSI score above 90% reflects a dealership's commitment to providing excellent service, which is crucial in a competitive market.

However, the importance of a high CSI score can vary depending on the dealership's location and target market.

For instance, in areas with high competition, maintaining a high CSI score is essential to stand out and attract customers. Conversely, in regions with fewer dealerships, a slightly lower score might still suffice, but aiming for excellence is always beneficial to build a strong reputation.

Seasonal promotions can boost sales by 10-15% during slow months

Seasonal promotions can significantly boost sales by 10-15% during slow months for car dealerships because they create a sense of urgency and attract customers who might otherwise delay their purchase.

During these slower periods, dealerships often experience a lull in customer traffic, which makes it crucial to implement strategies that can draw in potential buyers. By offering limited-time discounts or special financing options, dealerships can entice customers to make a purchase sooner rather than later, effectively increasing sales.

Moreover, these promotions can help clear out older inventory, making room for new models and keeping the dealership's offerings fresh and appealing.

However, the effectiveness of these promotions can vary depending on factors such as the local economic climate and the specific types of vehicles being promoted. For instance, a dealership in a region with a strong economy might see a more significant boost in sales compared to one in an area experiencing economic downturns, and promotions on popular models might perform better than those on less sought-after vehicles.

Dealerships in urban areas often allocate 3-5% of revenue for ride-sharing partnerships and fees

Dealerships in urban areas often allocate 3-5% of revenue for ride-sharing partnerships and fees because these partnerships can significantly enhance their business reach and customer base.

In densely populated cities, the demand for convenient transportation options is high, and ride-sharing services are a popular choice. By collaborating with these services, dealerships can tap into a steady stream of potential customers who might be interested in purchasing or leasing vehicles.

Additionally, these partnerships can help dealerships stay competitive in a market where traditional car ownership is declining.

However, the percentage of revenue allocated can vary depending on the dealership's size, location, and target market. For instance, a dealership in a city with a high concentration of ride-sharing users might allocate more funds to these partnerships compared to one in a less urbanized area. By strategically investing in ride-sharing partnerships, dealerships can ensure they remain relevant and profitable in an evolving automotive landscape.

Inventory shrinkage due to theft or damage should be kept below 1% of total inventory value

Inventory shrinkage due to theft or damage should be kept below 1% of total inventory value in a car dealership because it directly impacts the dealership's profitability and operational efficiency.

Car dealerships operate on relatively thin margins, so even a small percentage of shrinkage can significantly affect their bottom line. Additionally, cars are high-value items, meaning that even a single instance of theft or damage can result in substantial financial loss.

Keeping shrinkage below 1% helps maintain a healthy inventory and ensures that the dealership can meet customer demand without unexpected shortages.

However, the acceptable level of shrinkage can vary depending on factors such as the dealership's location, security measures, and the types of vehicles in stock. For instance, a dealership in a high-crime area might experience higher shrinkage rates, necessitating enhanced security measures to mitigate losses.

Effective showroom layout and design can increase sales conversion rates by 5-10%

An effective showroom layout and design can significantly boost sales conversion rates in a car dealership by creating an inviting and engaging environment for potential buyers.

When customers walk into a well-organized showroom, they are more likely to feel comfortable and spend more time exploring the vehicles, which increases the chances of making a purchase. A strategic layout can highlight key models and features, guiding customers through a thoughtful journey that aligns with their interests and needs.

Moreover, a well-designed showroom can enhance the overall customer experience, making it easier for sales staff to interact with customers and address their questions effectively.

However, the impact of showroom design can vary depending on factors such as location, target market, and the specific types of vehicles being sold. For instance, a luxury car dealership might benefit more from a sleek, minimalist design, while a family-oriented dealership might focus on creating a warm and welcoming atmosphere. By tailoring the showroom layout to the specific needs and preferences of their customer base, dealerships can maximize their sales potential.

Dealerships should aim for a year-over-year sales growth of at least 5-7% to remain competitive.

Dealerships should aim for a year-over-year sales growth of at least 5-7% to remain competitive because this growth rate helps them keep pace with industry standards and inflation.

In the automotive industry, maintaining a growth rate of 5-7% is crucial as it reflects a dealership's ability to adapt to market changes and consumer demands. This growth rate also ensures that dealerships can cover rising operational costs and invest in new technologies or marketing strategies.

However, the ideal growth rate can vary depending on the dealership's location, target market, and the types of vehicles they sell.

For instance, a dealership in a rapidly growing urban area might aim for a higher growth rate to capitalize on increased demand, while a dealership in a more stable or rural market might find a 5% growth rate sufficient. Additionally, dealerships specializing in luxury vehicles might experience different growth dynamics compared to those focusing on economy cars, as consumer behavior and economic factors can impact these segments differently.