Article

Why Have A 60-Day Used Vehicle Turn Policy

August 2007, Auto Dealer Today - WebXclusive

by Michael Rees - Also by this author

Many dealers and used car managers wrestle with the length of time to keep a used vehicle on the lot. If the used car manager is paid on wholesale profit and loss, it becomes difficult to wholesale anything at a loss. Allow me to explain why this is a mistake and show you how taking that loss will actually make a profit.

Let’s take the average priced vehicle over 60 days old. When it came in to stock at ABC Motors, it was valued at $13,000. We can presume it was worth every penny of $13,000.

After 30 days, it is still probably worth 98 percent, or $12,740. That isn’t anything to worry about; it can still be retailed to make all the money.

After 60 days, it is probably now worth 95 percent of the original appraisal, or $12,350. If we retail out of it, no problem.

After 90 days, it is worth maybe 90 percent, just $11,700. If we were to wholesale it now, we would lose more than $1,000. So, let’s keep it and hope we retail it; after all we could retail it for the original appraisal and still break even.

On the contrary, it stays around and before we know it, the vehicle is 150 days old, and we would be lucky to wholesale it for $10,000. We certainly don’t want to lose $3,000, so we keep hold of it and continue to hope to retail it.

Now we have every salesperson walking around aged inventory, and it becomes a lot fixture. We can’t possibly wholesale it now without losing a fortune, so here it stays.

Let’s go back to 60 days. If we have a policy in place to turn every vehicle at the 60-day mark, we would wholesale this vehicle and lose $650.
 
However, we still think there is a chance to retail it, so we hang on to it for another 30 days. Now, we are 30 days over our current policy (a total of 90 days), so we have to move it. It is wholesaled, and we take $11,700 for it. On the face of it, we lose $1,300.  On the other hand, that has freed up used vehicle inventory money that we can reinvest in a fresh, exciting piece of inventory. Now, we have a new vehicle that salespeople and customers are excited about. If you don’t think customers know what is new on your lot and what has been there for a while, think again!

This new vehicle sells within 30 days and returns our average profit of $1,875 plus F&I.  From our original $13,000 vehicle we have made $575 plus F&I, ($1,875 profit minus the $1,300 wholesale loss), and we have our $13,000 back to invest in another fresh piece.

We again invest in more inventory and sell the second vehicle within the next 30 days, returning another average profit of $1,875 plus F&I. Total profit returned is $2,750 plus F&I on two retailed vehicles in 150 days.

If we had held on to the original vehicle for 150 days, we would be faced with about a $3,000 loss and would not have had two new customers on our books. A 60-day policy made a difference of over $5,750 extra profit (the $2750 profit we wouldn’t have seen plus the $3000 loss you didn’t report because your policy forced you to wholesale much sooner). Multiply that by the number of vehicles you have in stock over 150 days.

The reality is that the profit on a fresh vehicle is more than the average, which makes these numbers even greater. Also, your customers will notice your inventory with a 60-day turn policy in place and stay interested.  They will know that if they are interested in one of your used vehicles, they better act quickly because the used vehicles at ABC Motors don’t stay on their lot for long.

On the contrary, it stays around and before we know it, the vehicle is 150 days old, and we would be lucky to wholesale it for $10,000. We certainly don’t want to lose $3,000, so we keep hold of it and continue to hope to retail it.

Now we have every salesperson walking around aged inventory, and it becomes a lot fixture. We can’t possibly wholesale it now without losing a fortune, so here it stays.

Let’s go back to 60 days. If we have a policy in place to turn every vehicle at the 60-day mark, we would wholesale this vehicle and lose $650.
 
However, we still think there is a chance to retail it, so we hang on to it for another 30 days. Now, we are 30 days over our current policy (a total of 90 days), so we have to move it. It is wholesaled, and we take $11,700 for it. On the face of it, we lose $1,300.  On the other hand, that has freed up used vehicle inventory money that we can reinvest in a fresh, exciting piece of inventory. Now, we have a new vehicle that salespeople and customers are excited about. If you don’t think customers know what is new on your lot and what has been there for a while, think again!

This new vehicle sells within 30 days and returns our average profit of $1,875 plus F&I.  From our original $13,000 vehicle we have made $575 plus F&I, ($1,875 profit minus the $1,300 wholesale loss), and we have our $13,000 back to invest in another fresh piece.

We again invest in more inventory and sell the second vehicle within the next 30 days, returning another average profit of $1,875 plus F&I. Total profit returned is $2,750 plus F&I on two retailed vehicles in 150 days.

If we had held on to the original vehicle for 150 days, we would be faced with about a $3,000 loss and would not have had two new customers on our books. A 60-day policy made a difference of over $5,750 extra profit (the $2750 profit we wouldn’t have seen plus the $3000 loss you didn’t report because your policy forced you to wholesale much sooner). Multiply that by the number of vehicles you have in stock over 150 days.

The reality is that the profit on a fresh vehicle is more than the average, which makes these numbers even greater. Also, your customers will notice your inventory with a 60-day turn policy in place and stay interested.  They will know that if they are interested in one of your used vehicles, they better act quickly because the used vehicles at ABC Motors don’t stay on their lot for long.

 

Vol 5, Issue 7

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