Top 5 Floor Planning Mistakes by Dealers

By Chris Miller, Business Services Managerchris.miller

When it comes down to it, floor planning in its essence is a very basic process: you open a line of credit, purchase inventory with said credit, sell inventory and pay back the loan. Intertwined amongst the basics are a lot of moving parts that at times can cause complications. While there are many variables out of the dealer’s control, from the economy to auction prices, there are a few that are essential in driving success. Regarding tangibles that dealers can control around floor planning, it’s important to understand the most common mistakes made.

Here are the top five mistakes dealers make when it comes to floor planning.

1. Mismanaging cash flow
There’s an old saying that goes “cash is king.” That’s true whether you’re running a deli or buying and selling in the automotive industry. Cash flow is the number one key to a successful business. It can positively and negatively affect everything from advertising and staffing to acquiring business tools such as vAuto’s Auction Genius. And what’s more, it certainly can impact your relationship with creditors.

One of the benefits of floor planning is it frees up cash for other expenses and business investments. However, a common mistake is not taking into account that many of these bills mature at the same time. Improper cash management may cause dealers to get into a borrowing cycle that provides little wiggle room and thus creates a shell game of money cash from one debt to another constantly.

2. Over-extending
The automotive industry is full of companies that provide lines of credit for purchasing inventory; in fact, there are nearly 200 in the U.S. currently. It’s important to manage your line of credit so that you can grow your business responsibly. One scenario that happens far too often is dealers over-extending themselves when it comes to inventory. When you purchase more inventory than you can sell, you put yourself at risk if you can’t make the payments.

Moral of the story: Just because you are approved for a $250,000 line of credit doesn’t mean you have to go out and spend it all at the next auction. Buy in proportion to your sales figures.

3. Communicate Inadequately with Floor Plan Provider
No business likes surprises, especially finance companies. You should strive to keep your floor plan provider abreast of any changes, updates or issues regarding your business. Have a payment you won’t be able to make on time? If you have a payment that you know in advance you won’t be able to make, let them know as soon as possible. By being proactive and honest, you stand a better chance of your floor plan provider working with you to help resolve issues.

4. Raise Red Flags
Most floor plan providers keep an eagle eye on all accounts in search of red flags that alert them to issues with dealers. There are three specific red flags that your floor plan company is watching for: NSF’s, Collateral Audits and Turn-times.

NSFs
Insufficient funds (or NSFs) are directly correlated to points #1 and #2 above. When you can’t make your payments on time, or your checks/ACH’s bounce, rest assured that your floor plan provider is now watching your account closely. This is one of the biggest indicators that there is an issue with how you’re managing your account and ultimately how the creditor views their chances of being repaid. This puts the floor plan provider at risk as they advanced funds on a certain piece of collateral.

Collateral Audits
Your floor plan company is a collateral-based lender. And that collateral is the physical inventory – not the title of the vehicle. As with any lender, it’s important that the collateral can be physically verified based on the agreed terms, usually monthly. When your floor plan provider can’t verify inventory, another flag is raised. If you need to move inventory to another location for a big tent sale or to an auction, let your floor plan provider know.

Turn Times
The NIADA and NADA have done extensive studies that show used vehicles should be turned every 45 days, as your ability to make money on aged inventory goes down over time. This may not fit all dealer’s business models; however, your floor plan company is going to get nervous if they see a vehicle on your lot for an extended period. Many times dealers hold inventory “looking for the right buyer” instead of cutting their loss and moving the unit at an auction. This allows them to acquire fresh inventory to market to customers.

5. Improperly Manage Account
When you open an account with a floor plan provider, it’s imperative that you understand the exact expectations the company will be holding you to. Find out when payments are due and what different tools are at your disposal. By taking advantage of these resources, such as valuation tools or payment schedules, you can make it easier on yourself when it comes to running your business.

Another great source is your floor plan or auction representative. These individuals meet regularly with other businesses and sister companies, so they are abreast on what’s happening in the industry and can provide some great insight.