Having access to the right amount of capital is essential for a dealership’s business to run profitably and grow efficiently. Dealerships stay accountable and profitable when they have the correct amount of credit on their dealership floor plans. Not having enough, or even having too much capital on hand, can lead to issues and problems for a dealership down the road. So how can a dealer find out if they have the correct amount of capital on hand?
A simple and effective formula makes it easy for a dealer to learn how much capital they truly need. This formula simply entails taking a dealer’s cost of goods sold, divided by yearly lot turns. Please note that the number used for a dealer’s cost of goods sold means the total cost of inventory for a year, which includes reconditioning costs.
Depending on a dealer’s current inventory and sales goals, the dealership floor plans credit amounts will vary. Let’s work through a few examples of how this formula can play out for a dealer.
If a dealer’s cost of goods sold is $500,000 to support $625,000 in sales, and assuming a dealer has five turns a year, this dealer should only need a $100,000 line of credit to aid dealership efficiency and profitability.
Let’s try another situation. Assume a dealer’s cost of goods sold is $2 million dollars to support $2.5 million in sales. If this dealer has six turns per year, this dealer should only need about $333,000 to ensure a balanced amount of capital to run their dealership efficiently.
Use this formula to calculate how much capital your dealership needs. How do your dealership numbers line up? Use this formula in conjunction with the formulas found in our “Three Floor Plan Finance Formulas Every Dealer Should Know” to gain a full picture of your dealership’s balance of inventory, capital and sales goals.