How To Stock Winners

Interest rates are rising and new-vehicle margins continue to be squeezed, especially by manufacturers that are desperate to make sales. Aggressive pricing from auto makers tends to hurt residuals on the used-inventory market. This makes it essential to manage the used-vehicle inventory. It is especially important in stocking a right product mix and managing days' supply and days in stock. Ask yourself:

Interest rates are rising and new-vehicle margins continue to be squeezed, especially by manufacturers that are desperate to make sales.

Aggressive pricing from auto makers tends to hurt residuals on the used-inventory market. This makes it essential to manage the used-vehicle inventory.

It is especially important in stocking a right product mix and managing days' supply and days in stock.

Ask yourself:

Which vehicles have the greatest exposure to loss and/or market condition changes?

What is the model-year mix of my inventory right now?

What is the average price of the vehicles that I stock and what is the average price of a vehicle that I sell retail?

Which vehicles give the best return on investment?

Now, let's consider what can be done to boost profits for the used-car operations.

One thing to do is look at return on investment. Gross profit is typically sales minus cost (investment). Return on investment would be the gross profit divided by the investment.

This gives an annualized rate or percentage of return on your investment. The next key is to introduce how long you held the vehicle in order to generate the gross. Let's say you realize a greater gross on a high-priced vehicle but sold only one vehicle, while another model generated less gross but was turned four times. Which of these vehicles returns the best ROI?

The following is one way to calculate ROI:

How to do the math:

Step 1: Calculate the Rate of Return
Gross Profit $1,300
Investment/Cost Divide $10,000
Rate of return Equals 13%
Step 2: Annualize the days in stock
Days in the Year 365
Days in Stock-Actual Divide 45
Annualized Turn Equals 8.1
Step 3: Calculate the Velocity of Money
Rate of Return 13%
Annualized turn Multiply 8.1
Return on Investment Equals 105%

Once you calculate the actual return on investment (including days in stock or holding period) you can do a vehicle best-ROI spreadsheet by make, model, and/or price range.

Examples of these reports are shown below. Much of this data can be pulled from sales-history files in your computer system.

For example, ADP has a Pre-Owned Vehicle Analyzer report. Autosoft also has a report that shows this information (see Accounting/Reports/Vehicle Sales). ARKONA users can access this report (business office menu/sales analysis/ROI).

UCS users can access this report with vehicle mix/order reporting software.

For Reynolds & Reynolds users, this report may be available soon.

There are some system providers that go much deeper into inventory analysis.

See which vehicles work best for your dealership. Often it is four- to seven-year-old vehicles that have the best profit potential and lowest risk of loss. Whichever, days of stocking inventory based on gut feelings are long gone.

Profitable dealers have strong used-vehicle departments based on efficiencies and tracked sales performances. Inventory management is just one facet of a successful used-vehicle department, but it is an important one.

CPA Wayne Fortier is a dealership consultant with Dixon Hughes PLLC. He is at 919-876-4546.

ROI/Velocity By Model and Price
Year Make Model Cost Sold Gross Days ROI
95 Honda Accord 4 Dr EX 6000 7300 1300 20 237%
00 VW Jetta 4DR 9000 10300 1300 40 119%
02 Audi A4 13000 14300 1300 60 79%
Organize Sales for Each Vehicle
Accord Count Cost Sold Gross Days ROI
+20K 33 23186 24300 1114 52 34%
$15-20K 19 17765 19000 1235 44 58%
$10-15K 17 13611 14900 1289 35 99%
$5-10K 21 7506 8800 1294 22 286%
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