Efficiency in Motion

02/13/2024
Industry Advice

How Smart Inventory Management Transforms Recurring Revenue

In the dynamic landscape of the auto industry, dealerships constantly face the challenge of managing inventory effectively.

Beyond the aesthetic appeal of gleaming vehicles on the lot, the financial implications of inventory management are substantial. The critical role of moving inventory swiftly is not only as a means of generating immediate cash flow, but also as an opportunity to capitalize on residual revenue streams. There are some key strategies for lessening the financial burden of managing inventory parameters more efficiently.

Jumpstart sales for immediate revenue

In the fast-paced world of auto sales, the adage “time is money” couldn’t be more accurate. Dealerships have a limited window to capitalize on the initial excitement surrounding new inventory arrivals. This jumpstart not only injects immediate cash flow but also sets the stage for a consistent annuity of revenue through subsequent sales. The 72-hour window to pay off floorplans is crucial here, as it ensures that credit is available to quickly reinvest in new inventory.

Curtailing floorplans for long-term profitability

To sustain profitability, dealerships must navigate the turbulent waters of floorplan financing. The reduction of advance percentages, higher interest rates, and renewal fees presents an opportunity to reduce floorplan liability effectively. However, it’s a delicate balance, as prolonging the floorplan repayment period can eat into profitability. Incentivizing sales through promotions or discounts becomes essential during extended floorplan periods to maintain revenue streams.

The perishable nature of inventory

Even though automobiles are thought of as hard assets, they are perishable goods in the dealership context. The longer a vehicle sits on the lot, the more it depreciates and becomes a financial burden. Beyond the depreciation factor, the real cost of holding inventory lies in tying up capital that could be utilized elsewhere. Dealerships should adopt the philosophy of “Make hay while the sun shines,” emphasizing the need to make effective use of the opportunity to sell vehicles before they become costlier liabilities. Many dealers’ policy is to get a vehicle off the lot at some particular inventory age, often 60 days. Spiffing the sales staff to put maximum effort into selling older inventory in preference to newer inventory is a common strategy. Further, a practical problem with stale inventory is that a slow-to-sale vehicle is occupying valuable space that could be used for other inventory that may sell faster.

The importance of inventory turns

Inventory turns, a key metric in the auto industry, directly impacts a dealership’s financial health. Consider the following examples: if a dealership has $100,000 in retail inventory value and achieves six turns, the gross revenue generated is $600,000. However, with 10 turns, the gross revenue catapults to $1 million. This illustrates the magnitude and cumulative effect of efficient inventory turnover. Another financial benefit of a brisk turnover is more inventory can be acquired generating higher unit sales without using larger floor plan debt.

Every turn contributes not only to immediate revenue but also positions the dealership for long-term success.

Strategic decision making

The decision to send slow moving vehicles back to auction requires careful consideration. It can be a double-edged sword – at auction you will be able to salvage some value, and holding onto slow moving inventory amid growing expenses poses financial risks. The careful balance between lot space and inventory movement becomes more complicated under inventory pressures. Dealerships need to adopt a strategic mindset, evaluating each vehicle’s potential to contribute positively to the bottom line.

Building cash assets vs. inventory

As dealerships strive for financial resilience, building a cash asset becomes imperative. This involves a strategic shift from merely focusing on the sale of vehicles to a comprehensive understanding of the entire financial equation. By calculating the difference between the car cost and the floorplan cost, dealerships can determine the optimal balance between maintaining inventory and building a cash reserve as a result of smart inventory management.

The revenue impact

Moving inventory not only provides commensurate cash flow but also opens the door to residual revenue opportunities. Dealerships that prioritize efficient inventory management create a more sustainable business model. The residual cash flow from satisfied customers, repeat business, and positive word-of-mouth advertising becomes a reliable source of income.

In the ever-evolving auto industry, the ability to move inventory efficiently is not just a matter of survival; it’s a pathway to prosperity. Dealerships that master the art of jumpstarting sales, managing floorplans judiciously and understanding the perishable nature of inventory will not only survive but thrive. By focusing on inventory turns and strategically managing the delicate balance between lot space and inventory movement, dealerships can build a cash asset that ensures both immediate and residual revenue. In essence, making hay while the sun shines is not just a saying; it’s a strategic imperative for sustained success in the competitive auto market.

To read the featured article from Used Car Dealer Magazine, click here.

About Agora Data, Inc.

Agora Data, Inc. is an automotive industry fintech revolutionizing financing for car dealers and finance companies. Car dealerships can secure affordable capital to build their own non-prime captive finance company, obtain actionable loan performance data to improve their lending portfolios, and use a wide range of solutions to grow their business safely. Powered by patent pending artificial intelligence (AI) and machine learning technology, car dealers can access real-time data analytics and planning resources to help optimize the performance of their portfolios. Agora Data made history by closing the first-ever crowdsourced non-prime auto securitization in 2020 and continually brings groundbreaking financing solutions to an underserved market. For more information, visit www.agoradata.com.