For dealers that purchase inventory with cash, dealership cash flow primarily hinges on a dealer’s ability to sell vehicles for more than the cost to acquire them. In theory, earning a profit and recouping costs should be a simple task. However, many cash-buying dealers eventually find that their dealership’s growth and ability to acquire inventory is often limited by their overall cash flow, which can be even further restricted by a slow season or issues making sales. Though it may often seem like purchasing inventory with cash is preferable to other options, the additional flexibility and cash flow afforded by an auto floorplan provider can assist in growing overall business operations.
Purchasing Inventory With Cash
A lot of dealers often prefer to use cash to buy vehicles. It allows them to own the vehicle in full, it doesn’t collect interest or fees, and when the car is sold all profits go to the dealership. However, dealers often don’t consider the full costs of using dealership savings.
Buying inventory with cash means that money will be tied up in the vehicle’s value. Those funds can’t be used for other opportunities that could potentially grow dealership operations. Like any business, there’s a set amount of cash set aside for a variety of expenses, like payroll, facilities and operational tools. If a dealer is using cash to pay for both inventory and regular operating expenses, how much is left over to really re-invest in the business?
Additionally, when a dealer purchases a car with cash, their cash depreciates along with the value of the vehicle. The longer a vehicle stays on a dealer’s lot, the more their initial investment will depreciate. By the time a dealer realizes that a vehicle has depreciated, it is often difficult to recoup costs due to overall holding costs.
Using An Auto Floorplan
With an auto floorplan provider, a dealer purchases a vehicle and has no personal investment in the vehicle until the first payment is due, which is typically only a small fraction of the original vehicle value. Depending on a dealer’s contracted terms, that could potentially be 30 days after acquiring the vehicle. For example, floor planning dealers aiming to turn inventory approximately every 60 days will have very little of their own cash tied up in a vehicle, especially if it sells within that time frame.
Even if a vehicle isn’t sold during a dealer’s preferred time-frame, dealers are able to use the extra funds that aren’t tied up in the vehicle to make payroll, pay the bills and keep the business up and running.