Common Reasons Dealerships Fail

June 28, 2019

Dealership owners have a responsibility to plan for worst-case scenarios. So, what are some common pitfalls that could cause the demise of your dealership? Here are four common reasons behind dealership failure and some steps you can take to avoid them.

1. Insufficient cash flow

Dealerships occasionally experience cash flow lulls during the normal course of operations. Minimizing the financial impact of these cash shortfalls requires planning by owners and financial managers.

Start by reviewing your balance sheet for any excess cash that’s invested in unproductive resources. For example, dealerships sometimes stock more parts inventory than is needed to meet customer demand. This extra days’ supply of inventory results in “frozen capital” that can hinder cash flow.

Failure to collect accounts receivable in a timely manner can also crimp your cash flow. This goes for both vehicle receivables and parts and service receivables. For example, slow movement of paperwork through your dealership from the date of vehicle delivery through accounting and F&I can hinder cash flow, as can sending incomplete financing applications to lenders. On the parts and service side, be sure to promptly issue invoices and strictly enforce your credit policies by extending credit to only preapproved customers.

2. Poor inventory management

Managing used vehicle inventory is critical for auto dealerships. Your goal should be to increase the number of annual turns of used vehicles in order to boost overall revenue. To manage your inventory more effectively, consider offering a wider variety of brands as you plan your used vehicle inventory mix. At many dealerships, between 60% and 80% of the used vehicle inventory consists of dealership-branded vehicles. Instead of stocking such a high percentage of these vehicles, consider stocking the hottest selling vehicle brands in your market area.

On the new vehicle side, it’s usually smart to sell vehicles that have been sitting on your lot for a while before those that recently arrived. Also, be careful to stock vehicles that you believe will move fast. Also, strive to carry a good mix of inventory to offer customers a wide variety of choices.

3. Fraud and embezzlement

Dealerships can be especially vulnerable to fraud due to the large amounts of cash that are kept on the premises and their relatively small accounting departments. A strong internal control system is a proactive way to guard your dealership against fraud and embezzlement.

For example, financial and accounting tasks, such as making deposits and reconciling transactions, should be segregated among two or more different employees. This will help prevent an employee from stealing funds and manipulating the books to cover his or her tracks. Other effective controls that can deter fraud include requiring the accounting department to post all transactions on a daily basis, performing random inventory counts in the parts department, requiring an owner or financial executive to personally endorse all checks instead of using a check stamp, and having the owner review the bank reconciliation monthly.

4. Economic or industry downturn

The overall economy and automobile industry have been strong the past several years. However, this shouldn’t lull you into a sense of complacency — a downturn could happen at any time. Do you have a contingency plan?

To minimize the financial impact of a slowdown in vehicle sales, focus on the fixed operations side of your business. The gross margin on vehicle sales is generally lower than the margins on ancillary offerings, such as parts and service and F&I. Building sales and customer loyalty in these high margin departments can help you hedge against a possible sales slowdown.

For example, offer buyers an incentive to return to your dealership the first time they need vehicle service — this might include a coupon for a free oil change. And make sure their experience in your service department is a pleasant one so they’ll want to return.

When it comes to F&I, concentrate on selling the most profitable F&I products that are in the highest demand among customers. Also consider using a digital F&I menu to present options to customers instead of an old-fashioned paper menu.

Be proactive

Discuss these and other steps you can take to foster success with your managers and executive team. Also talk to your CPA about ways you can proactively guard against business failure.

© 2019