AFTERSALES ABSORPTION RATIO

Character 1 (Trainer) : When sales continue to be flat or declined? Margins are getting thinner than
ever? How do you know how long dealership can sustain the slowdown?

Character 2 (Trainee): um!?????

Character 1: Well! Check the company’s Aftersales Absorption Ratio.

Character 2: What? What is Aftersales Absorption Ratio?

Character 1: Aftersales absorption ratio is a critical measurement that indicates how much of the
company’s total expenses can be covered by the profitability of the aftersales department.

Character 2: That sounds interesting! But how does it will help me during slowdown?

Character 1: Let us first examine how to determine the absorption ratio. The KPI is calculated by
dividing all aftersales gross profits by the costs they cover.

Aftersales absorption ratio = (Aftersales gross profit / Total operating expenses) * 100

Aftersales gross profit includes gross profits of:

|Parts department | Service department | Body Shop

And total operating expenses includes expenses for operating:

Parts department | Service department | Body shop | Fixed expenses | and Semi-fixed expenses
|Rents | Salaries | IT expenses

Character 2: Well I got that! In other words it will let me know what is going to happen when you
suddenly stop selling units or sales slowdown.

Character 1: That’s correct! For example, if the dealership has combined gross profit in the
aftermarket departments of ₹ 80,000,000 and overall company expenses of ₹ 70,500,000, your
absorption calculation would be:

₹80,000,000 / ₹70,500,000 = 107%

The high absorption ratio will help to be in a position to continue showing profitability even in down
cycles.

Character 2: That’s perfect! What is the benchmark for absorption ratio? What are all the impacts of
it on lower side and higher side?

Character 1: Dealerships often aim for higher than 80% aftersales absorption ratios, most likely to
survive a poor sales period.

A low aftersales absorption ratio indicates that it is time to start increasing your aftersales revenue
by, for example, upselling on open jobs, campaigns, and packages to keep the company’s business as
stable as possible.

A high absorption ratio indicates that it is time to expand the sales department and increase the
sales coverage.

Character 2: Ahh! I got that all now. And it was a key takeaway for me. Thank you very much.