Maintaining dealership profitability relies on dealers to continually balance their inventory and cash flow. With a floor plan, dealers have more cash flow to stock their lots with needed inventory. However, what’s the optimal amount of inventory that should be purchased on a dealer floorplan?
First, take a look at your dealership’s key performance metrics including floor planning numbers, sales and average turn times. How much inventory do you currently sell per month? How much inventory would you like to sell per month? Be sure to select a realistic sales goal.
Then, consider how quickly your dealership turns inventory. If you turn inventory every 60 days, you completely sell your lot’s inventory 6 times per year. For dealers that turn inventory every 40 days, you’d turn inventory 9 times per year.
Let’s work through an example to figure out how much inventory an example dealer should stock on their lot.
If our example dealer wants to sell 30 cars per month, or essentially one car per day, that dealer has a desired sales goal of 30 cars. Simple enough, right? We also assume that this dealer currently has an average lot turn time of 60 days. So their lot gets turned 6 times over the course of the entire year. To figure out this dealer’s optimal inventory level, we take the number of monthly desired sales, divided by the dealer’s lot turn time, times the months in a year.
|Monthly Desired Sales||30|
|Total Yearly Lot Turn (Assuming a 60 day average turn time)||÷ 6|
|Months in the Year||X 12|
|Optimal Inventory Stocking Number||= 60 Units|
In this scenario, our dealer should aim to have approximately 60 vehicles on their lot.
Plug in your dealership’s current numbers. Do you have the right amount of inventory currently in stock?
Keep in mind that the ability to purchase your calculated optimal amount of inventory will depend on the amount of dealership savings you have on-hand, or the line of credit your dealership is approved for.
Regardless of the amount of credit your dealership is approved for, be sure to floor plan responsibly. At NextGear Capital, the recommended mix of a dealer floorplan and cash on hand is 70/30, respectively. Plan to keep a balanced amount of extra credit and cash available to ensure your dealership overhead is covered.
Keeping the right amount of inventory on your lot is crucial to balancing your dealership’s overall cash flow. If you’re concerned your dealership doesn’t have the right balance of inventory and cash flow, contact us or reach out to a local representative.