Article

Keep Your Eye on Your Used Vehicle Department

January 2011, Auto Dealer Today - WebXclusive

by David Keller, CPA, CFE - Also by this author


Hopefully, the worst for the automotive industry is behind us. We all know it is a very cyclical industry, but the last few years have taxed us all, in more ways than one. We have survived the Cash for Clunkers program, a 30 percent or more decrease in new vehicle sales, and a sorely depressed economy, which seems to keep sputtering just as you think it is finally on the road to health.

Well, what is going to happen next? As I talk with our dealers across the country, they seem fairly optimistic—cautious, but optimistic. They know the next 12 to 24 months will still be tough for most dealerships as they struggle to regain the sales volume they once had.

Most dealerships have been surviving and making a profit only because used vehicles have been selling fairly well. Most dealerships have retained good gross profits, and some have increased their gross profit per unit to a value higher than they averaged in the past few years. This is all good news in light of the decreased new vehicle market. Used vehicle sales for some dealerships have also been increasing, which only improves the bottom line. With more used vehicle sales, there has also been a boost to the service and parts area as internal sales have also increased.

What does all this tell us? I think it says you should not lose concentration on used sales when new sales start increasing. With new car sales increasing very slowly, make sure someone is still concentrating on increasing your used vehicle sales each and every month. This will take some effort and creativity on everyone’s part to accomplish.

First, make sure you are signed up and in good graces with as many of the major subprime finance company and local credit unions as are available to you. Review all the terms and conditions needed for approval of your deals, and find out if you are gathering and submitting all the necessary stips the first time. This will improve your cash flow dramatically, as those extra days can sometimes give you much grief.

There seems to be increased scrutiny by floorplanners on the number of days it takes for them to get paid after a vehicle has been sold. This can put a serious cash flow burden on your store and eat up quite a large amount of your accounting office’s time chasing money. The floorplanners also seem to be requiring a stricter policy on overage units, requiring monthly pay-downs to keep the value of the vehicle in line with the current wholesale price (as if used vehicle prices have fallen recently). They are requiring monthly pay-downs on new vehicles also, but since most dealers’ new inventory is down dramatically from years past, this has not created as much of a problem.

Most of my dealers – new, used and BHPH – are still struggling to buy a decent vehicle at a normal wholesale price in order to stay competitive. Everyone seems to be very cautious in what and how many to buy, so they don’t get caught if the market suddenly falls apart. I do not have a crystal ball ( I ordered one on the Internet but haven’t received it yet), but I don’t see used vehicle prices dropping until sometime next year. How can they drop when there is such a shortage of used units everywhere and everyone is trying to find the next one to steal at the auction? I predict it will take two to four years to recover from this and rebuild the used inventory available nationwide.

With year-end buying time approaching, I think used prices are going to spike again by an average of $1,000 by the end of January. It doesn’t seem possible, but if you look at what history has mostly shown us, used car prices always go up by the end of January by at least $1,000 to $1,500 per unit. Everyone tells me every tax season, they wish they had bought more vehicles by year-end and they could have made a normal gross profit just by running them through the auction in February. What stops most people are their floorplan limits and the fear they will get too greedy and get caught with decreasing prices in the year they finally try to beat the system.

Most of my BHPH dealers are already looking at increasing their inventories right now and not waiting until the prices go up. This will put a strain on the market as the remaining vehicles will force more pressure upward on prices. It seems many people try to start earlier and earlier each year but still can’t seem to beat the price increases.

With this in mind, review prices throughout the year and what has happened in past years. Plan now so you can try to at least take advantage of a somewhat better mix of vehicles to buy and somewhat lower prices. It may already be too late. Good luck. I will hear how all of you have done this year during the 2011 tax season. I want to hear good news for once. And if I ever receive my crystal ball, it will take the guesswork out of this.

Vol. 7, Issue 11

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