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.