Understanding and tracking the cost of stock acquisition
There is more to the cost of stock than the physical asset with all elements having an influence on profit.
We examine the factors that add to a dealer’s cost base and explore how these can be mitigated or reduced to improve margin.
A common misconception when it comes to the buying and selling of cars is that it’s a relatively uncomplicated process.
For those not fully aware of the complexities of the trade, it may seem as simple as buying a car, preparing it to the best condition possible, getting it on the forecourt and then counting the cash from selling it at a decent margin.
Well if only that was the case! As every experienced dealer knows, the vehicle itself is just one cost among many – all of which need to be factored in and reduced where possible to prevent erosion of already tight margins.
Let’s look at some of the key cost factors to consider, how they influence profit and their impact on cash flow.
Beyond purchasing the vehicle itself, the immediate costs will come from sourcing the vehicle– if it’s an auction, there will be fees to pay – followed closely by transport expenses and the refurbishment costs required to get a vehicle retail ready.
Getting the vehicles ready for sale
The prepping of a vehicle through paint and bodywork repairs, mechanical fixes and valeting all combine to exert pressure on precious finances. However, it’s important to remember this is a balance, as time spent wisely at this stage will influence the speed of sale and the price achieved.
Movement of stock
Ultimately, every car that sits on a dealer’s forecourt for more than 30 days increases the potential to lose money. Money is lost in the depreciation in value, time spent by staff chasing sales and the advertising costs incurred in marketing the vehicle successfully.
The key solution to mitigating these costs is to move stock more quickly and by doing so improves volume. Selling more cars in the same amount of time generates greater profit even if it means taking a lower margin on each vehicle.
However, this requires a very agile stock buying operation, one which will very much depend on having access to readily available funds. Dealers can’t afford to have all their working capital tied up in unsold stock; successful dealers have the next car lined up and ready to go as soon as a sold car drives away with its new owner. No dealer wants to see an empty space on their forecourt - it’s a highly visible sign of a missed opportunity.
Utilising your cash flow
Having a bespoke Stocking Plan, such as that offered by NextGear Capital, provides the opportunity to ease that cash burden. Being able to source the most suitable and sellable vehicles for the forecourt without having to worry about finding the cash up front to fund the stock and associated costs, aids business flexibility - and takes a huge headache away from the dealer by saving on labour-intensive admin.
Initial purchase costs such as auction and transport fees can be bundled up into the Stocking Plan. This helps save time on and assists with cash flow as all associated buying costs are settled on the sale of the vehicle, rather than upfront during the purchase.
And remember a Stocking Plan can be used to fund vehicles from all sources, not just auction houses.
In summary, as we have outlined the costs beyond the physical asset of the vehicle are varied, all with the capacity to place pressure on a dealer’s cash flow. The key here is to sweat the asset but don’t let the costs associated with it sweat the business.