Article

The Speed of Money

April 2008, Auto Dealer Today - WebXclusive

by Scott Dreisbach - Also by this author

<>
For as long as I can remember, we have all been trying to grow our individual businesses and gain a larger portion of the market share. It has always been about turnover, and it is still about turnover (the speed of money) today.

Have you ever wondered how one of your competitors always seems to be able to deliver more vehicles than you, how someone in your 20 Group was continuously selling 1-to-1 (or more) used vehicles to new, or how they grossed more per unit than you? What about those who were able to experience little or no “wholesale pain”? It’s all about the turn. It’s no secret. We all know that the “quick turners” gross more. That goes for both the new vehicle department as well as the used.

The term, “Maximum Turn Guide” refers to the amount of time in days when your best return on investment happens. We all know used vehicles are a depreciating asset from the moment of acquisition and the time held has a direct correlation to the amount of return we generate.

In all of the studies I have ever seen or conducted, the first 30 days of life on the lot are, by far, the days of our best retail opportunity. As any used vehicle manager knows, an important part of their job is to continually put vehicles on the lot that retail quickly. The more of this that can be accomplished, the better off the store is. Oftentimes, however, we end up choosing to (or having to) retail out of a unit that didn’t turn as quickly as we had hoped. You are better off taking a wholesale loss, and re-investing the money in a quick turner than to try to avoid a wholesale loss by retailing out of a vehicle that was probably wrong for your inventory on day one.

When we retail out of a vehicle, we a take a good customer and put together a poor deal to cover a mistake that we made on the day of acquisition. Big box retailers have long known the speed of money concept and you will not find inventory in these stores that does not move at retail. The “shelf space” is far too valuable. If an item moves well, they stock more of it. If it doesn’t move well, they phase it out and try something else. This is a continual process.

Look at the two examples on the right to see how quickly your money grows when you make the decision to wholesale a vehicle that is not moving.  The first example illustrates the individual who keeps hoping that the unit will sell and doesn't want to take a wholesale loss at any cost.

The second example illustrates a much more complicated scenario of ongoing sales, both wholsale and retail, in the same time period, all of which have to be added together for a full comparison of the speed of money.

As you can see, the cash flow gain by concentrating on turning the money puts you ahead in this simple example by almost $3,200 in the same time period. It is not always about the profit, but it is always about the turn. The speed of your money will determine how much profit there will be. Increase the speed of the money and you will definitely increase your profit.

Increasing the “speed of your money” is simply having more of the right product on the lot more of the time and less of the wrong product taking up shelf space. This sounds easy, and with a well thought out system, it can be accomplished.

Develop and implement a system that will separate your sales, gross and inventory by categories of vehicles (small cars, mid size cars, Sporty Cars, etc), and by model years within each category (used vehicles) or specific model numbers within each new vehicle sales category. Your stocking guide should include your target supply number for each type of vehicle (45-day supply for used and 60-day supply for new) based on the actual sales rate, not a forecast.

This stocking guide number should then be compared to the actual total availability for each category. If you are long or short in any category, develop an action plan with your managers to correct the condition. Daily vigilance in seeing that your action plan is being implemented is vital. In reality, most managers say they are “too busy” to manage, or even look at, such a system. They “don’t want to get bogged down in details.” If that is the case in your store, make a change in the manager, the current process, the manager’s thinking, or invest in an inventory management system that will be believed in and used. The benefits of this type of investment will far outweigh the cost, and increasing the speed of your money will be the result. 

Vol 5, Issue 3

Assumptions

  Average commission 25% of Gross Profit/ or $300 flat

Average Front-end retail gross profit

 $1,800 

Average re-detail cycle    

 30 Days

Average re-detail cost 

 $75 

Example one:  Holding a used vehicle for 120 days and ultimately "retailing out" of the vehicle.

Day 1 Invest.  ($10,000)
Day 30 re-detail   ($75) 
Day 60 re-detail   ($75) 
Day 90 re-detail   ($75) 
Day 120 Sale Price           $9,000 
Commission  ($300) 
120 Day Loss  ($1,525)
Amount to Reinvest  $8,475

Example two:  Wholesaling the vehicle at 60 days and re-investing in "quick-turning" inventory

Day 1 Invest.  ($10,000)
Day 30 re-detail   ($75) 
Wholesale Price at Day 60  $9.000 
Final Sale Loss  ($1,075) 
Amount to Reinvest  $8,925 
Invest Sells in 1st 30 Days  $10,725
Profit on 2nd Sale  $1,800
Commission  ($450)
Reivest. Amount  $10,275
Invest sells in 1st 30 Days  $12,075
Profit on 3rd Sale  $1,800
Commission  ($450)
120 Profit  $2,525
Amount to Reinvest $11,625

Your Comment

Please note that comments may be moderated. 
Leave this field empty:
Your Name:  
Your Email:  

Blog

On-the-Point

Jim Ziegler
A Faster Horse

By Jim Ziegler
The Alpha Dawg wonders where the demand for driverless vehicles is coming from and has good news and bad news — but mostly bad news — for Fiat Chrysler and Cadillac dealers.

Strangers in the Mall

By Jim Ziegler
The Alpha Dawg makes new friends, stands up for Cadillac dealers, charts the rise of the independent lots, and reconsiders free trade agreements.

You Can’t Handle the Truth

By Jim Ziegler

Watch Out for Grizzlies

By Jim Ziegler

Opening Observations

Over the Curb