New Vehicles:
We have noticed a robust supply of new vehicles at our clients’ lots. Most brands are experiencing lower sales volumes in recent months. Vehicle manufacturers have a healthy supply of inventory and are coercing dealers to purchase the excess supply. This results in dealers with weak inventory controls ending up with more inventory than necessary.
As we all know, interest rates have risen as much as one percent recently and floor plan interest expense is growing. In prior years, many of our clients had a credit balance in their floor plan interest expense after recording the floor plan assistance money. This trend is reversing as interest rates rise, inventory levels have ballooned, and unit sales have declined.
The general manager and sales manager must be held accountable for the supply of new vehicle inventory and the dealer must have strict policies in place for them to follow. The standard is to have a sixty day supply on hand, but few dealers adhere to this.
Used Vehicles:
When new vehicle sales are strong and incentives are high, it is difficult to merchandise used vehicles. Does it make sense for a consumer to purchases a two year old used vehicle when there is a $4,000 to $5,000 incentive on the comparable new vehicle? Considering these conditions, it is critical to have strong used inventory controls.
Studies have shown that a used vehicle’s sales price will decline on average by $750 every fifteen days that it ages. There are very few success stories with used vehicles that are over sixty days old. If a unit has “sat” on your lot for sixty days it is a problem. I suspect at most stores the sales staff has “given up” on selling the aged units.
Our more profitable dealers carry an inventory supply of less than sixty days. Most of these dealers have a policy of having all used units “prepped” and ready for sale within five days of purchase or trade in. These dealers have a significantly higher gross profit per unit and lower ageing.
Parts Inventory:
Parts inventory levels have been shrinking for most of our dealers in recent years. They use reports from the DMS systems to allow for sophisticated ordering systems that help to reduce the required quantities. Dealers should be returning excess parts on a monthly basis. Your parts inventory should be turning a minimum of nine times a year.
Make sure that you have an independent parts company conduct a physical inventory annually and have the office reconcile to the general ledger balance. General ledger balances should be compared to the “pad” balance at the end of each month.
In conclusion, profitable dealers have strong controls in place to ensure that they have the appropriate level of inventories. Each store should have bench marks for inventory levels that are monitored on a regular basis. Dealers must respect the fact that aged inventories have a significant cost to the store.
If you have any questions regarding this article, please contact Paul McGovern at PMcGovern@DowneyCoCPA.com or at 800-849-6022.
