2015 has been a year of growth for the motor industry. Sales increased 30% year-on-year, the second consecutive year of strong growth in the sector, and new car sales surpassed 100,000 for the first time since 2008. In addition, given the number of positive forward-looking indicators, it appears that the motor sector will continue to enjoy this growth period for 2016.
In this article, we discuss the current state of the Irish motor sector and also consider how dealers can ensure this growth period is also a profitable one.
The period January to November (inclusive) has seen a 30% year-on-year increase in total passenger car sales, according to SIMI. In fact June was the only month this year in which sales were lower when compared with the same period in 2014, which highlights the adjustment in consumer behaviour to the bi-annual registration system. Furthermore 2015 has been the best year since 2009, as illustrated in the chart below:
Despite the momentum in sales over the past two years (i.e. since the start of 2014), 2015 sales still lag behind 2007 and 2008 levels (see chart above, right). With the average car on Irish roads over eight years old, combined with a strong economy and good credit conditions for consumers, there is capacity for further growth in the motor sector. Industry experts are anticipating that sales could potentially reach 150,000 in 2016.
In a growing environment it can be very easy to fall into the trap of chasing high top-line figures without this translating through to your bottom line. It is therefore important that dealers have a grip on their finances to capitalise on profitability. Conducting a review of your business can tell you how you have performed during this current growth period and how you can factor this into your 2016 budget.
In reviewing your profit and loss account over recent years, your business’ performance should be illustrated through a series of Key Performance Indicators (KPI’s). These will tell you how your business is performing against prior year; against budget and also, through SIMI’s industry statistics, against the industry as a whole.
KPI’s could take the form of, for example, sales growth percentage and also look at margins such as: gross profit margin; Earnings Before Interest, Taxation, Depreciation and Amortisation (EBITDA) margin, EBIT margin, profit before tax percentage and profit after tax percentage. It is subsequently through the explanation of variances against budget, prior year and industry, that you will understand what is driving your business’ performance. For example a KPI may show that:
Once you have analysed how your business has performed, then you can build such performance into your 2016 budget and be fully aware of what risk areas may hinder your growth plans.
This should including a thorough review of your working capital management policy. Such analysis will indicate if your business has the resources required to support the forecast growth. Insufficient working capital resources (i.e. not having enough cash or not having access to credit) may negatively impact margins (i.e. by driving up interest costs) as well as creating liquidity risks (i.e. should there be an unexpected withdrawal of credit).
To measure the efficiency of your working capital management, you may consider calculating your cash conversion cycle and reviewing how working capital is being funded. A thorough review will indicate:
Examining your business’ working capital management policy and efficiency over the past 12 months will indicate what resources are needed to be committed for the coming year to support growth forecasts, which can then be factored in to your 2016 budget.
Cash is the lifeblood of any business. That principle may have seemed more important during the height of the recession when dealers had greater cash flow pressures to service fixed costs. Nonetheless, the efficiencies learned during the recession should not change despite strong growth since 2014. If businesses are maintaining margins and managing their working capital efficiently, then this will translate through to cash flow, thereby allowing you to reinvest and expand your business.
Sales levels are forecast to grow for a third year in a row for 2016 and some industry experts are predicting sales of 150,000. Should this happen, it will mark a 17% year-on-year growth and equal 2008 levels. As dealers try to capitalise on this growth period, we recommend a tight grip be kept on management of your business’ finances and primarily cash flow. In a cyclical industry with tight margins, such as the motor industry, embracing cash flow management will put your business on a sustainable platform for long-term growth.
