Countering the Cash Flow Problem through Service31 May, 2005 By: Jim Kahrs imageSource
Countering the Cash Flow Problem through Service
Payroll time rolls around, and
after taking a quick glimpse in the checkbook a panic attack suddenly follows.
How are you going to pull in the cash needed for payroll in the next three days?
Where did things go wrong?
The fact is almost every dealer I know has faced cash flow problems at one time
or another. The recent trend of significant drops in service contract street
prices has not helped the situation. Nothing causes cash flow problems more than
erosion in service revenue. Whether it happens overnight or over the course of a
few years, as experienced by many dealers, this is a preventable situation.
So if things have gone too far, there are some critical steps that can be
followed to prevent the situation from recurring.
Step 1: Assign responsibility for service revenue
In most dealerships everyone knows who is responsible for driving equipment
sales, whether it’s the VP of sales, sales manager or dealer principal. However,
when I ask who is fully responsible and accountable for service revenue, I often
get blank stares or comments like, "Service revenue just comes in from sales and
renewals, we don’t need to really drive it."
Nothing could be further from the truth. Service revenue is the backbone of the
company and must be driven just like equipment revenue. If you haven’t assigned
full responsibility for this area, you should do so as soon as possible.
Depending on the size and structure of your dealership, you can assign this to
the service manager, contracts administrator or dealer principal. Whoever it is
assigned to, the point is to hold them just as accountable for service revenue
as you hold the sales team accountable for equipment revenue. Then measure their
performance and put targets and incentives in place to reward increases in
This can be as simple as assigning a service revenue quota to the contracts
administrator and then paying a bonus for exceeding the quota. For example, if
your current run rate for service revenue is $30,000 per month, you could pay a
2 percent bonus for each dollar billed in excess of $30,000. In this case, a
month with service revenue of $33,000 would yield a bonus of $60 to the contract
administrator, and if this growth kept up, the administrator would earn an
additional $720 for the year while the dealership brought in an additional
$36,000 in very profitable service revenue.
This would provide an incentive for the contracts administrator to solicit new
contracts from customers who currently pay per call or make sure that he/she
does everything possible to save a contract that is being cancelled. With this
plan in place you now have someone who not only tracks the service revenue, but
shares in the fruits of his/her efforts.
Step 2: Compare your performance against industry benchmarks
The purpose for comparing your actual performance against industry benchmarks is
to determine the best place to put your time and attention. You look for the
areas where your performance is below the model target as these are the areas
where you can realize the fastest improvement.
For example, the BTA Copier Model states that 35 percent of your total revenue
should come from service revenue. If your numbers reveal that 28 percent of your
revenue comes from service you need to work out a plan to bring this number up.
Of course, you only target plans that increase service revenue. Reducing
equipment sales would help meet the percentage goal, but would be detrimental to
the dealership as a whole.
Another example would be the target for revenue per machine. The BTA Copier
Model targets $75-$95 per machine. If your numbers fall below this, it can mean
that the installed base is made up of mostly small machines or that the
percentage of machines under contract is low. Either way, there are plans that
can be implemented to correct the situation. Two of these plans are reviewed in
steps three and four. The driving point here is to establish the areas of your
dealership that fall short of industry targets and start addressing them.
Step 3: Implement a plan to
drive service revenue
There are a number of different plans that can be put in place to drive service
revenue. They all start by simply making a decision to be proactive. One of the
most successful plans I’ve implemented begins with determining exactly which
machines in the field are under contract and which are not.
From there, a list of non-contract machines can be created and a plan can be
developed to get as many of them under contract as possible. Once the list is
created you must determine which machines are still in use and which have been
removed from the customer location. The list of "still in use machines" is
reviewed to remove any machines that won’t be offered a contract because of the
age or condition of the machine.
This list is turned over to the sales department as leads for upgrade. The
balance of the list is gone through systematically to determine what type of
contract will be offered and a plan to sell the contract is put in place. I have
utilized service, sales and administration personnel to solicit these contracts
one by one. When done properly, this program results in new contracts and
service revenue being added. It also helps to solidify your relationship with
Step 4: Increase your contract prices annually
Your cost to service your customers goes up every year. There are increases in
office rent, health insurance, fuel prices, part costs, and annual salaries just
to name a few. In order keep up with these costs, a dealer must increase service
contract prices. Dealers who do not increase contracts annually usually tell me
that they are afraid of the reaction they’ll get from customers. They think
they’ll be bombarded with angry phone calls.
Having done this with many clients, I can tell you that this is not the case.
Just last month I worked with the management team of a dealership that had this
concern. I asked them to trust me and we implemented a 7 percent increase on all
contracts. Last week during a visit with the dealership, the contracts
administrator couldn’t wait to tell me that they had sent out 45 contracts with
the new rate and received only one phone call from a customer who had questions
about the increase, but was far from irate. If you’re not increasing your
contracts annually, you should start doing so, and if your increases are less
than 5 percent, I would recommend increasing them to 7-10 percent.
The cash very often lies in service revenue. If you allow this all important
area of your dealership to run on cruise control, you may be faced with a cash
crunch at some point in the future. However, if you drive service revenue with
the tenacity usually applied only to equipment sales, you’ll not only safeguard
your cash flow, but you’ll increase your profitability as well. And I haven’t
met a dealer yet who doesn’t want or need more profit from their dealership.