Auto dealerships are looking for tips on how to manage cash flow as they work to make it through this coronavirus pandemic.
One of the biggest problems for dealers now is pre-owned inventory. The goal is to have no more than a 30-day supply of used vehicles on your lots, said Don South, a NADA 20 Group manager and dealership management consultant.
“You have to concentrate on the old receivables and assets and turn that inventory into cash,” South said during an April 3rd NADA webinar. “You want to generate profit to pay expenses and people. To maximize inventory, you have to keep everything moving.”
If your dealership has more than a one-month supply of used cars, you need to figure out how to get it back under control. Gross opportunity and the value of the vehicles decline with age, he said.
“Figure out the value and number of units and figure out which units to unload first,” South said. “You want to concentrate on the oldest buckets first. The more expensive vehicles in inventory tend to also be the biggest problems. Identify which vehicles are causing you the problems and figure out a plan with what to do with those vehicles.”
Facebook Marketplace is a free and an easy place for dealers to sell their used inventory. As Facebook is getting more traffic and consumers want to shop from home, there is no better time to use the platform to sell. All leads from Marketplace are delivered through Facebook Messenger so dealers need to ensure they can manage those conversations either through a chat tool or team members.
As soon as car auctions start back up and things start returning to normal, South anticipates a huge rush to start dumping cars and raising cash, which will likely cause used vehicle prices to go down, not up.
“You want your money to work for you and not be frozen,” he said. “You might want to think about what you want to do now. Maybe sell your cars to wholesalers. If it were me, I’d want to minimize the hits as soon as possible. You as a dealer have 100% control over your used vehicle inventory and your parts service.”
South was one of three NADA 20 Group executives who gave their expert suggestions on ways to manage cash flow during COVID-19 in the April 3rd webinar. This is part of the Dealership Lifeline Webinar series hosted by the National Automobile Dealers Association.
“Your goal is to keep your doors open, keep your employees employed and keep your customers coming in,” South said.
The NADA guide for contracts-in-transit suggests dealers have a maximum of 20% of the month’s vehicle sales, and get funding within three days of the sale, said Tim Gavin, a NADA 20 Group dealership management consultant.
“An efficient, well-run dealership should finish every deal in three days,” Gavin said in the webinar. “The next few months are going to be really trying for auto dealers. You have to be very careful.”
The eight critical concerns for a dealership right now include four cash accounts and four inventories, Gavin said.
The cash account concerns are: contracts-in-transit; accounts receivable vehicles; customer parts, service and body shop receivables; and factory receivables.
The inventory concerns are: parts inventory, technician’s time inventory, new vehicle inventory, and pre-owned vehicle inventory.
Best practices to handle contracts-in-transit, according to Gavin:
- Print the schedule and review daily.
- Identify and resolve problems.
- Focus on contracts over 3 days old.
- Track the cycle time from delivery to funding.
- Sweep for contracts in the dealership, including the sales managers’ desk drawers.
- Adjust pay plan to include penalties for late C.I.T.
- Release frozen capital and increase cash.
For both vehicle and factory receivables, Gavin suggests also printing out the schedule and reviewing it daily, identifying and resolving problems, as well as focusing on the oldest items.
Dealers need to figure out what’s tying up their cash. He suggests always having at least 30 days of cash, and now possibly even considering having 90 days of cash available to be safe, Gavin said.
“Who’s slowing you down? Where’s the rub? Is it working?” he said. “You got to be mean. You got to be tough. You want everybody to be excited, to be accountable and work on receivables. There are no excuses right now.”
When it comes to warranties, does your dealership have enough people trained who are also being accountable? It should be a general manager or higher position who takes care of warranties, Gavin said.
“Be fastidious today about who owes you money,” he said. “Be very careful. Look at receivables in the parts department. Normally parts should be paid within 30 days.”
What is the timing on your billing? Who’s in charge of collections? You need to get the money now, Gavin said.
“The time to act is now. It’s time to have an action plan on everything you do,” he said. “You need to close repair orders to make more money. You need to deliver parts waiting for customers. When the car leaves the lot, close the ticket.”
Dealerships need to be ready for when things start to get back to normal, said Mark Rogers, a NADA 20 Group manager and dealership management consultant.
“History says the OEMs are going to come out with some really good programs,” said Rogers, who expects the value of used cars to be 25% lower. “If they continue that there will be a rush on new cars, then that means used car values are going to go down. You have to make sure you’re buying it right. It’s an interesting time. If it doesn’t move, you don’t carry it. You need to make sure you have the inventory, but you also need to make sure you have the right inventory.”