Boost Gross Profits by Improving Inventory Management

March 22, 2019

Smart inventory management is important for any retail business. However, it’s crucial for auto dealerships when you consider the costs associated with stocking excess vehicle inventory.

From January through November 2018, the average dealership paid more than $53,000 a year in floorplan interest expense, according to NADA Dealership Financial Profiles. Carrying costs — such as keeping vehicles clean, well maintained, secure and insured — add even more to the expenses associated with poor vehicle inventory management.

Taking a comprehensive view

Managing inventory efficiently can help reduce interest expense and vehicle carrying costs, and thus boost dealership profitability. However, some owners place a higher priority on managing their used vehicle inventory than they do their new vehicle inventory. They may, for example, believe that new vehicles don’t depreciate, or that factory floorplan assistance will cover the interest cost of carrying older-age vehicles.

Also, pay close attention to parts and accessories. Dealer reps may push you to buy more than you need, and some items, such as electronic sensors, speakers and DVD players, may be particularly susceptible to obsolescence or theft. And vendors oftentimes offer award programs for buying a certain quantity of a specific part or accessory to entice you to purchase more than you require.

Focusing on new inventory

Taking a proactive approach to the management of new vehicle inventory can help improve your dealership’s financial performance and increase your gross profit. Here are a few ways to improve new vehicle inventory management:

Keep a close eye on key metrics. Compare your dealership “days’ supply” to the market days’ supply across all makes and models. To calculate days’ supply, divide the number of vehicles in stock by the number of vehicles sold over the past month.

Achieving the right balance between these metrics minimizes the risk of aging, higher interest expense and lot upkeep that can eat into your profit margins. In general, larger gaps between these metrics suggest that you’re stocking the wrong level or models of vehicles.

Give older vehicles fair treatment. The longer vehicles have been sitting around, the more money they’re costing you. So, arrange older vehicles on your premises with the same enthusiasm as newer ones.

For example, park older vehicles up front where customers are more likely to see them and salespeople are more likely to show them. Also highlight older vehicles on your website and in online ads.

Only stock vehicles you can sell quickly. Which vehicles give you a competitive advantage over other dealerships in your area? If you know that your competitors can sell certain makes or models at a lower price than you can, or are able to offer incentives that you can’t, don’t bother stocking these vehicles.

Carry a good mix of vehicles. Affordability has become a big issue with many customers as the average new vehicle price keeps rising. Thus, you should offer customers a wide range of choices in terms of price and features. This includes both fully loaded and base models.

In addition, you should predicate your inventory management decisions on hard sales data, not gut instinct. This requires generating accurate data from your dealership management system as well as outside sources such as DMV registrations and your manufacturer. Find out which vehicles are selling, how much they’re selling for and how long they’re taking to sell.

Asking others for input

Implementing efficient inventory management practices is a smart way to boost profits. But you don’t need to go it alone. Your managers have frontline insight into effective strategies to improve how you control inventory at your dealership. And your CPA knows auto industry benchmarks and best practices to get your inventory management strategies up to speed.

Inventory accounting: LIFO or FIFO?

When accounting for new inventory, dealerships typically use one of two accounting methods: last-in, first-out (LIFO) or first-in, first-out (FIFO). The wrong choice costs you from an income tax perspective.

Dealerships can generally reduce income taxes by choosing LIFO instead of FIFO. Assuming that prices are rising, counting the last vehicles that arrived on your lot as the first ones sold will typically increase the cost of goods sold. And that, in turn, will presumably lower net income and taxes.

Since LIFO reduces net income, it’s not always the right choice for a dealership. This is especially true if the owner plans to sell the store soon. Talk with your tax consultant about your decision.

© 2019