Accounting for discounts

[bam]

How do you account for discounts? Change the labor rate? Charge to policy? Charge to advertising?

I thought I found my answer at a recent 20 Group meeting but following this email exchange with our controller, I'm back to square one.

Please review this exchange and then give me your thoughts.

I wrote to him:
At the 20 Group meeting last week, I asked about customer discounts and how to account for them. Scenario: in an attempt to compete, we agree to discount a job by $70. I always looked at two options 1) Reduce the labor rate for that job to whatever it needed to be to reduce the price by $70, (rarely chose this option because it hoses my effective labor rate) or 2) ID an hour and thus charge $70 to policy. (Not a great option either as my policy account is about 3%of gross profit and it should be closer to 1%.)

Well, the boys and girls at the meeting seemed to be in harmony in their condemnation of both practices. Their solution and practice? Charge the discount to advertising. Better yet, create a specific advertising account to capture this type of advertising so that we can monitor our discounts.

His response to me:
We need to discuss Im disappointed to hear that our 20 group GMs allow this advertising accounting paying sales tax on income never collected and paying commissions (assuming they do for svc mgrs and/or svc advisors) on income never received doesnt strike me as very prudent.

I did not realize that we were NOT consistently using option 1 below. If we dont collect revenue then it SHOULD affect the effective labor rate. Think about it this way, if we discounted every job we did by 50% and then reported that our effective labor rate was $60/hour were just deluding ourselves our effective labor rate under this scenario IS $30/hour thats the effective rate that we collect for the hours of work we do regardless of the reason we did it it is what it is, not what we want it to be.

I agree we should not be going to policy with it, but it is not advertising either, it is a reduction in revenue that we have chosen to make. I agree we should be collecting this in an account, but we need to account for it correctly, i.e., reduction in revenue

Help!!

[Old Irish]

This is a prime example of how 20-groups can be such a snare and dillusion.

Discounts should come "off the top", with service and parts each sharing a proportionate amount of the burden. Forget putting the amount into any sort of different account. When you discount you are reducing the amount of the sale, period. That should reflect in the sales amounts on the RO.

I can't beleive there are dealers out there still advocating the "charge it to advertising" method. I thought that went away with the dinosaurs.

OK, OK.....I'll admit...we do it too....but ONLY on the "Seniors Discount" as the oldsters seem insist on seeing a separate line item showing a discount....and that's the easiest way to show it. Otherwise....it comes off the top, period.

Heh heh heh. See? Even I skew things around....and I'm the one saying "don't skew the numbers" !!! After awhile dealer-to-dealer comparisons become all but pointless.

If the effective labor rate suffers, then so be it. At least you have a "real number" and not some fantasy-land thing that is the result of some clever manipulating done in order to show an improvmement in whatever "hot button" category was the latest "hero" topic at the last 20-group meeting and which will be replaced, in a couple months, with some other "hot button" after the NEXT 20-group meeting.

There are a hundred ways to skin a cat. I tried a few dozen of them myself .

As for your policy account, I share your pain. Mine is quite high, too. I get a good reaming at each month's statement meeting. Funny, I sent the dealer and the GM to the next 20-group meeting with a list of questions as to how other dealers handle policy work and none were answered, other than "we just don't allow it."

I will say this..... my GM warranty expense has been below "zone" and "national" for some years now....and I've never been audited. Whether or not any conclusion can be drawn from that....well....I'll let you guys decide. I'm inclined to think "yes", personally.

I don't kid myself, though.....if "policy" is high there will surely be a variety of contributing factors. But, I write-off what needs to be written off and don't spend a lot of time crying about it or figuring out some way to make it disappear. When I see that a dealer is selling $150-$170K a month in labor and the policy account is $800, well, I just gotta wonder. They must have awfully tight controls and mistake-proof technicians. But, hey, now I just whining and I'll be the first one to admit it .

Heck, we just wrote a $1204 check to a dealer 325 miles away ....one of our techs didn't tighten the u-joints straps and the guy lost his driveshaft at 70 mph. Lot's of damage. What would you guys do ? Tell the customer "Sorry, the warranty is only good if the car comes back to us for repairs?". I don't have the you-know-whats for that !

Rant over !!!

Cheers to all

DD

[PartsJD]

Why don't you charge the discount off according to the type of discount it is.

If you are running a advertised special or a coupon then charge the discount to advertising.

If you are discounting because of some sort of mistake (wrong parts, misdiagnosed, parts took too long, etc.) then charge the discount to policy.

But if you are just discounting for a good customer, to match an estimate or any other reason (like the 10% VIP or Senior Citizen) then take it off the top either labor or parts or both.

[Old Irish]

The money you spent to create the mailers, newspaper ad or whatever medium you used to get the coupons to the customers....THAT's advertsing expense.

The discount you give as a result of the coupons is not advertising.....it is a reduction of sale amount. When you give away gross profit, it is not advertising.

It would be like sales department selling a car for $4000 below sticker price, write a cales order showing that the sale was was made a full window sticker price, and then charging off the difference to advertising.

Cheers
DD