Improving Cash Flow with Precise Inventory Management

If you want to improve the health of your business, precise inventory management may provide the cure.

I’m often astonished at the amount of money tied up in new vehicle inventories older than 180 days. But dealers don’t necessarily view this as a pressing problem, because their working capital usually isn’t financing the inventory and new vehicles don’t depreciate in the same fashion used vehicles do.

The reality is that rising levels of aged new vehicle inventory can have a very adverse impact on dealer cash flow. As aged inventory rises, floor plan expense follows. And dealers with rising inventories tend to order less from their factory, which results in reduced floor plan credits, ad credits and holdback. Very quickly a dealer can go from making $30,000 a month in floor plan income to paying $20,000. A $50,000 swing in 60 days hurts!

And this doesn’t include the financial impact of the discounting necessary to unload aged units, or the costs associated with lot rot and its impact on customer satisfaction scores — which can also negatively impact cash flow from factory CSI programs.

Successful new car dealers are using granular market days supply data to identify unique model/trim/color combinations that are overstocked in the market on day one in inventory. Once these vehicles are identified, action is taken to adjust pricing and digital marketing tactics.

One of my favorite lines in the car business is: “You’re running a business, not a museum.” Dealers with healthy inventories and strong inventory management principles realize this and have improved cash flow as a result.