Buying Car Dealership Inventory: Two Questions To Consider

Car Dealership Inventory Sitting on the Lot

A successful dealer is someone that can simply turn inventory into profit. However, ensuring that a dealer can remain successful depends on the answers to the two questions: how much car dealership inventory should a dealer stock, and how many sales should a dealer be making per month based on the units they have in stock?

How many units should a dealer have on the lot?
In order to determine how much car dealership inventory a dealer should have on hand, it would be good to have an idea of realistic monthly sales goals, and an anticipated turn time for units. Let’s say a dealer wants to sell 30 vehicles per month, and their average turn time is 60 days. A 60 day turn time means a dealer turns their lot 6 times over the course of the year. Using these numbers, a dealer should be able to figure out the best number of units they should stock based on their goals. Take the number of monthly desired sales and divide it by the lot turn time. Then, multiply that number by the number of months in the year.

Monthly Desired Sales    30
Total Yearly Lot Turn (Assuming a 60 day average turn time)    ÷ 6
Months in the Year    X 12
Optimal Inventory Stocking Number    = 60 Units

Using this formula, this dealer would need to stock 60 units based on a desired sales goal of 30 vehicles per month and a 60 day turn time.

Based on current numbers, how many sales should a dealer be making?
Current sales numbers in conjunction with current car dealership inventory can help to determine of if current sales goals indicate realistic benchmarks. Let’s say a dealer currently has 70 units in stock. Based on that number, how many sales should this dealer be making per month? Multiply the current number of units in stock by the average inventory turn time. Then, divide that sum by 12, the number of months in the year.

Units in Stock    70
Total Yearly Lot Turn (Assuming a 60 day average turn time)    x 6
Months in the Year    ÷12
Optimal Number of Sales Per Month    = 35 Units

In this scenario, this dealer should have the goal of 35 sales per month based on the current number of units in stock and average turn time.

Though these numbers might fluctuate for individual dealers, in the long term, knowing the answers to these two questions will help dealers ensure they have the right balance of cash flow and inventory each month.

The Flexibility of a Car Dealership Floor Plan

Dealer looks up Car Dealership Floor Plan on his phoneDealers thrive in a flexible, fast-paced environment, and dealership capital needs to be flexible as well. Though some dealers might think buying vehicles with cash is the most flexible option for investing in inventory, there are some key benefits that a car dealership floor plan offers that auto dealers should consider.

Floor plans free up dealership cash
Every dealership needs cash on hand for various expenses. For the most part, there’s a set amount of money a dealer has on hand at a time. In addition to paying for inventory, dealers use this cash to pay for employee salaries, facility maintenance, marketing and advertising and in addition to a number of other operating expenses.

Dealers that have a floor plan don’t have to use their cash to purchase inventory. The cash that would originally used to purchase inventory can now be put towards other expenses. This means dealers can focus those monetary resources on expanding and improving other parts of the business. For some dealers, this means hiring more help. For others, it can mean opening up a brand new location.

Dealers don’t have to convert inventory to cash
Using a car dealership floor plan ensures that a dealer can have extra capital on hand when it is needed. If a dealer only uses cash to purchase inventory, a dealer can only get that cash back if they sell the vehicle, either to a consumer or through other channels such as an auction. Selling a vehicle to a consumer for extra cash takes time, and sometimes dealership expenses can’t wait. In addition, there are extra fees often associated with selling a vehicle at an auction. A sell fee on a $20,000 vehicle within the first 60 days can easily be on par with a floor planning fee. Is it really worth the hassle of converting inventory to cash at auction every time your dealership needs extra money?

In addition, any inventory acquired that doesn’t sell will eventually lose value. If a dealer purchases inventory with cash, that means their cash also loses value. If a dealer wants to convert inventory to cash, it is highly likely that the value of that inventory, and in turn, the amount of cash a dealer can get back from the vehicle will be less than expected.

With a floor plan, if a vehicle hasn’t sold after a contractually determined number of days a dealer only has to pay for a small portion of the car’s value. Once the car sells, the dealer pays back the amount they initially bought the vehicle for.

Dealers require flexibility from their capital. Though it might seem more flexible to purchase inventory with cash, the dealers that use floor plans will often increase their purchasing power and improve the flexibility of their working capital.

The Mentality Needed When Purchasing Dealership Inventory

Dealer Uses iPad to Manage Dealership InventoryPurchasing dealership inventory with profit potential begins with a dealer’s daily choice to have a mentality of discipline and balance. Though selling cars is a primary focus for a dealer, a secondary focus hinges on a dealer’s ability to know when it’s time to buy more vehicles, to know what type of vehicles to buy, and to know when it is time to get rid of inventory that hasn’t sold. So where do you begin to create a culture of discipline and balance for your dealership?

Balance
Part of establishing dealership balance is determining realistic monthly stocking and sales goals. How many units can you sell in a month? How much inventory should your dealership stock? We recommend using three floor plan finance formulas to determine appropriate stocking and sales numbers. With those calculations as a starting point, your dealership should be able to get into a rhythm of adjusting stocking and sales goals based on results and current dealership conditions.

Discipline
Maintaining discipline year-round is crucial to dealership success. It would be easy to let dealership inventory sit on your lot until each vehicle has found a buyer. However, that isn’t always the most efficient use of dealership capital or lot space. Making and enforcing dealership inventory guidelines are an effective way to maintain discipline for the cars on your lot.

For example, your dealership could set a guideline for how much your dealership is willing to spend to repair and recondition a vehicle. When at auction, estimate potential repair and reconditioning costs. If a particular vehicle is on the edge of those costs, what factors determine if your dealership is willing to take a chance on that vehicle?

Another way to maintain discipline for your dealership could be addressing aged inventory. Does your dealership have an established exit strategy for aging inventory? If so, is that strategy consistently followed? Establishing a strategy for vehicles at 15, 30, 45 and 60 day intervals gives your dealership a good idea of what to do at any point in a vehicle’s lifecycle.

Of course, your dealership guidelines aren’t necessarily rules that are set in stone. There may be circumstances where your dealership will need to deviate from normal procedure. However, the specific circumstances and potential return on investment will determine if it’s a good idea to depart from normal guidelines

Though the choice to constantly maintain dealership balance and discipline isn’t easy, dealership success and profitability will show that it is often the best decision a dealer can make.

Make Wise Vehicle Investments With a Floor Plan Line of Credit

Dealer on Car Lot Using iPad to Manage Floor Plan Line of CreditIt is often said that used car dealers will typically make most of their profit margins with an initial vehicle purchase. In addition, almost all dealers are equally affected by margin compression and aged inventory which can cut into dealership revenue. This pressure on profits means it is even more important for dealers to make sure they use their floor plan line of credit to make wise inventory investments. How can an automotive dealer ensure they purchase vehicles with good potential profit margins?

Know What Sells
Not every dealership can meet the needs for all potential customers. A dealer looking to sell specialized high end brands is not likely to stock units valued under $5000 for sale. What is your dealership’s niche? What types of vehicles products and color combinations tend to sell best on your dealership’s lot? Are there any price points that seem to sell better than others in the market? For NextGear Capital dealers, use some of the analytics tools and reports available on myNextGear and look for any dealership patterns or trends.

Mind Dealership Needs and Budget When Purchasing
What type of vehicles do you need to restock your dealership lot? How much of your floor plan line of credit are you willing to spend to acquire a particular vehicle? What does potential retail mark-up look like? Walk the lot before an auction sale to figure out what inventory would fit at your dealership. Check vehicle values using the Manheim Market Report (MMR) and by using Value Lookup on myNextGear. Set limits on how much you are willing to spend for a particular vehicle, and be aware of how much of your floor plan you would like to use on sale day. Using your entire floor plan line of credit all at once will allow you to stock a lot of inventory, but keep in mind that you must have cash readily available to pay off the initial floor plan investment if those vehicles haven’t sold.

Weigh Reconditioning Costs
Before being sold on a used car dealer lot, some vehicles might need some repairs and will need to be cleaned. If a dealer has the chance to look at any available auction inventory details and walk the lot before the auction sale, it might be possible to gauge some of the reconditioning costs for a particular vehicle. Each dealer will have to decide on type and amount of reconditioning risk they are willing to take on. Evaluating units that need reconditioning and the potential cost of repairs before purchasing can give dealers a better idea of the profit margins they can make on a particular vehicle.

Dale Pollak from vAuto typically recommends dealers to strive for an average cost to market ratio of 84 percent for used vehicles. This ratio allows for a 16 percent difference between the cost to own and recondition a vehicle and its current retail asking price.

Purchasing inventory with good potential profit margins is a constant balance of knowing your dealership, keeping track of your floor plan, and knowing what vehicles have profit potential. Though this process might take some time to implement, it’s never a bad idea giving your dealership more chances to profit.

How Does Floor Plan Financing Work?

The terms “floor planning” and “floor plan financing” get thrown around pretty frequently in dealership and auction circles. But what do these terms really mean and how does floor plan financing work?

To put it in the simplest terms, floor planning and floor plan financing work almost like a credit card made solely for purchasing vehicle inventory.

Credit cards are issued by a bank to an individual. Individuals can then buy personal goods with the money loaned from the bank. The money borrowed from the bank collects interest, and one has the choice to either make a minimum payment or pay off the balance in full when the bill is due.

So how does floor plan financing work?
Much like a credit card, a floor plan financing company extends a line of credit to a car dealer. Dealers can then use their floor plan line of credit to purchase inventory from auctions and other inventory sources. If a dealer purchases a car on a floor plan, takes it back to their lot and it doesn’t sell within a contractually determined number of days, dealers are charged a small fee. As a dealer sells their inventory, they pay back the original loan.

With a floor plan, the initial investment needed to buy a particular unit is a fraction of the vehicle’s actual purchase price. As soon as that vehicle sells to a consumer, floor planning dealers have the ability to immediately realize profits, pay back the initial value of the loan plus interest and fees, and had the flexibility to keep their funds working for their dealership.

How does floor plan financing work specifically to benefit auto dealers?
Floor plan finance companies are uniquely attuned to the needs of auto dealers. Using cash or a bank line of credit to purchase inventory can work for some car dealers, but many floor plan financing companies offer a variety of dealer-specific benefits. In addition to freeing up the cash a dealer has on hand, other floor plan financing benefits can include extra flexibility in terms of paying off a particular piece of inventory, payment extensions and credit increases if necessary. Other services are also frequently offered which can include records management, title services depending on the dealer’s state, collateral protection and state-of-the-art online and mobile account management tools.

Though floor plan financing can seem like a confusing concept, in practice it can be an extremely beneficial business strategy for automotive dealers.

Want to learn more about floor plan financing? Contact us and we’ll walk you through how you can do MORE as a NextGear Capital dealer.

Managing Car Dealer Advertising Posts

A search engine bar with magnifying glass that signifies car dealer advertisingA key component of car dealer advertising is the information dealers make available online. What dealers present on their websites and digital advertising to potential customers can directly impact future customer interactions. If a car buyer can’t see any pictures or read any details about a vehicle’s history, they’ll likely move on. To avoid that outcome, dealerships must put care and consideration into their digital advertising posts.

Generating Leads and Exposure
Placing listings on sites like Kelley Blue Book, Autotrader or even doing a campaign with Dealer.com are some of the most popular ways to generate leads. In this form of car dealer advertising, it’s important to view posts as more than just lead generators. They can also create great exposure if executed properly.

Creating Posts That Achieve Results
To get people in the door for dealership visits, it’s important to create posts that resonate. Good car dealer advertising posts focus on the following areas:

  • Exceptional Photos: Photos are the first impression a buyer has of a vehicle. Not only do these pictures need to be clear and of good quality, but they need to show detail. Customers expect to see every inch of the car in these photos, and are looking to see everything from the tires to the space behind the driver’s seat. They don’t bother with dealership visits until they are confident in the merchandise.
  • Quality Content: Every used vehicle has a backstory. Car buyers want, and need, to have information about the vehicle’s history. Don’t leave out the details. What’s the current mileage? Has all maintenance been documented? What special features are available? Did the previous owner smoke? Providing details tells the story of the vehicle, and shows transparency to potential customers.
  • Accessible Contact Information: Let’s say a customer liked the photos and the description on a particular posting, and now wants to take a look at the vehicle in person. Dealers help to facilitate an easy buying process by making dealership contact information easily accessible. Including multiple contact methods will also increase chances of Without accessible dealership contact information, customers will move on.

When these ads turn into in-person visits, dealerships will need to confirm where the lead came from. Be sure to coach front-line team members to ask customers,“Where did you hear about us?”

Car dealer advertising is only as effective as the effort put into the photos and descriptions of each post. Without captivating photos and a detailed description, buyers might pass on their next vehicle. To turn that search for a vehicle into a buy, or at least a visit to the lot, dealers need to spend a few extra minutes on their posts. This can pay off quickly and creates long-term relationships with buyers who trust their dealerships.

Three Reasons Dealers Should Attend the 2017 NIADA Convention & Expo

speaker at NIADA conference and expo presenting to crowdDealers looking to improve their dealership operations will often need to seek out reputable sources for industry information. With constantly changing industry conditions, it’s important for dealers to stay in tune with best practices and network with other dealers. One annual opportunity to get an industry refresh is the National Independent Automobile Dealer Association (NIADA) Convention & Expo in Las Vegas. For dealers who are on the fence about registering for the NIADA Convention & Expo, here are three reasons to consider attending.

Training and Education
One of the major highlights of the convention is the number of educational sessions available. Industry experts and thought leaders will speak on a variety of topics relevant to automotive dealers. Subject matter for these sessions will range from topics on sales and leadership, technology, overall compliance to topics specific to BHPH dealers. The most frequently cited “don’t miss” experiences of the conference are the compliance breakout sessions. These sessions dig in deep to current and upcoming legislation that affect dealer business.

Meet Dealer Partners
Dealers will frequently use other tools and solutions to solve individual dealership issues. At the convention, dealers will have the opportunity to meet face-to-face with vendor representatives and learn about the various solutions they offer. While one dealership won’t utilize every service available, dealers can take the time to explore the variety of options available.

Network with Other Dealers
Each day of the conference will be spent with other dealer colleagues. With so many dealers in one place, auto dealers will be able to discuss shared struggles and best practices, which can lead to a shared knowledge base, community and sounding board for new ideas.

Get an industry refresh, learn from other dealers and network with potentially valuable dealer partners at the National Independent Auto Dealers Association Convention & Expo in Las Vegas.

Dealership Floor Plans: What is the right amount of capital?

Dealer using First Gear

dealer on car lot using phone to manage dealership floor plansHaving access to the right amount of capital is essential for a dealership’s business to run profitably and grow efficiently. Dealerships stay accountable and profitable when they have the correct amount of credit on their dealership floor plans. Not having enough, or even having too much capital on hand, can lead to issues and problems for a dealership down the road. So how can a dealer find out if they have the correct amount of capital on hand?

Learn about what happens if a dealer has too much or too little capital on hand.

A simple and effective formula makes it easy for a dealer to learn how much capital they truly need. This formula simply entails taking a dealer’s cost of goods sold, divided by yearly lot turns. Please note that the number used for a dealer’s cost of goods sold means the total cost of inventory for a year, which includes reconditioning costs.

Depending on a dealer’s current inventory and sales goals, the dealership floor plans credit amounts will vary. Let’s work through a few examples of how this formula can play out for a dealer.

If a dealer’s cost of goods sold is $500,000 to support $625,000 in sales, and assuming a dealer has five turns a year, this dealer should only need a $100,000 line of credit to aid dealership efficiency and profitability.

Let’s try another situation. Assume a dealer’s cost of goods sold is $2 million dollars to support $2.5 million in sales. If this dealer has six turns per year, this dealer should only need about $333,000 to ensure a balanced amount of capital to run their dealership efficiently.

Use this formula to calculate how much capital your dealership needs. How do your dealership numbers line up? Use this formula in conjunction with the formulas found in our “Three Floor Plan Finance Formulas Every Dealer Should Know” to gain a full picture of your dealership’s balance of inventory, capital and sales goals.

3 Mistakes Dealers Make When Buying Auto Dealership Inventory With Cash

Some dealers believe purchasing inventory with cash is the best option for their dealership. Keep in mind auto dealership inventory must often be purchased with a focus on the type of inventory that will sell, initial cost, in addition to a careful eye on overall dealership expenses. When the following three mistakes occur, it becomes clear that using a dealership’s own capital to purchase inventory is not the best choice for dealers.

#1: Dealers fail to assign a value to the cost of funds
Dealers who purchase auto inventory using their cash often fail to assign a value to the cost of funds. That is, dealers fail to consider all of the factors that contribute to the cost of using their own cash to purchase inventory. By using their own capital or cash to purchase inventory, dealers are tying up the use of their funds. This means they can’t use their cash on hand for any other expenses. In addition, since those dollars are locked into dealership inventory they only get their initial investment back when the vehicle sells above the initial purchase price.

Consider what those funds could be doing. When a dealership uses floor plan financing to make inventory purchases, their capital is still available to them to pay for other dealership expenses.

#2: Dealers forget that inventory depreciates in value
Would an investor purchase $1 million in stocks knowing that the next day it would be worth five or ten percent less and that the initial stock value would never return? Of course not. But when auto dealership inventory is purchased with cash, that’s the exact investment a dealer is making.

Those who buy with cash will often hold onto vehicles long term–they can’t sell them and don’t want to take a loss. So, dealers hold on to inventory. Though this action doesn’t seem like it would lead to a loss, the lack of discipline on that initial cash investment leads to loss.

The longer a dealer holds on to a piece of inventory, the more that inventory depreciates. If a dealer purchases inventory that sits on their lot for over a year, not only does the end sale price have to make up for how much the vehicle depreciated, but it also needs to be enough for a dealer to cover any expenses in addition to profit.

This is perhaps one of the most common mistakes dealers make when purchasing inventory. Purchased inventory depreciates more the longer it sits on a dealership lot. However, when a dealer uses a floor plan, dealers don’t have to use their own capital to purchase inventory and can use their cash on hand for other expenses.

#3: Dealers forget to be disciplined in purchases
Dealers who do not make wise buying decisions can get stuck with aged inventory. Funds are tied up in inventory and tough to liquidate at a profit. In addition, without other sources of capital or lines of credit, these dealerships are limited in what they can buy at peak consumer buying times. That can create situations where they are leaving opportunities on the table. Discipline in purchasing and knowing the type of inventory that will sell can mitigate aged inventory.

When using someone else’s money to make investments, decisions are made more efficiently and with a better eye on profit. For today’s investor in auto dealership inventory, that has to be the bottom line.

Utilizing the Right Amount of Capital From Dealer Floor Plan Providers

Dealer floor plan providers are typically the easiest way to access additional capital for a car dealership. However, access to the right amount of capital to purchase inventory is essential for a dealership’s business to run efficiently. Not having enough, or even having too much capital on hand can sometimes lead to problems for a dealership down the road.

Not Enough Capital
Not having enough capital is a common problem for automotive dealers. A lack of capital often means that a dealer is not able to purchase enough inventory to sustain their dealership. The lack of cash flow means that money is tied up in inventory and is depreciating, and the rest of it is often tied up in overhead. When dealers don’t have enough capital they will frequently turn to dealer floor plan providers to bridge that capital gap.

The line of credit initially given to a dealer by a floor plan company depends on a number of factors. However, a good floor plan company will continually work with a dealer to make sure they always have the appropriate amount of capital. However, on occasion, a dealer might have too much capital available.

Too Much Capital
Having too much capital can also lead to a number of problems. If they are not careful, too much capital could put dealership buyers in a position where they make bad decisions. They might not carefully purchase inventory tailored to their lot simply because they have the capacity to purchase a greater number of units.

Having excess inventory that doesn’t address market demand can cover up for sloppy purchasing. Which in turn, can make it a difficult problem to identify and resolve.

An excess amount of inventory can also cause the dealership sales team to become lax, since the extra inventory reduces the focus on aged units.

Just Right
Dealerships stay accountable when they use the correct amount of capital. At NextGear Capital, we typically recommend a 70/30 mix of a dealer’s floor plan and cash on hand, respectively. A balanced amount of capital means a dealership has enough on their floor plan to purchase new inventory, and enough cash on hand to ensure overhead is covered.

Keeping this balance is essential for dealers wanting to operate a profitable and efficient dealerships. Dealers who are concerned about their current floor plan balance should contact their dealer floor plan providers to ensure a balanced amount of capital.