Despite all these anomalies that have many talking about large pendulum swings of highs and lows, this industry has been and still is very resilient to tough times. As we notice the complications and unknowns within the market, it is best to focus on what we can control rather than what we cannot.
The controllable factors have prepared extremely successful dealers to make better decisions within their dealerships by focusing on key areas that drive the business in good or potentially bad times.
A few key areas we should be focusing on in the coming months are dealer operations and controlling working capital. If we look back at dealer operations, our processes have relatively stayed the same from inventory acquisition to the point of sale. The main differentiator is that we are further pushed to a virtual environment in comparison to kicking the tires at auction or consumer presence within a dealership.
Compared to the past, capital requirements for technology have not really changed, but the price of the inventory has drastically increased. Plainly put, consumers who used to not mind spending time in a dealership to negotiate and achieve max profitability, now want to spend as much time there as they do at a drive thru. This poses a challenge for dealers to make smarter investments to achieve the number of sales they want.
Buyers will pay for the right unit and are willing to travel to get it. This tells us the focus should be on expanding your virtual presence with an emphasis on maximizing your per unit gross profit. In this virtual world, the market grows exponentially as technology expands reach to link consumers and inventory with a seamless online process. With the stakes being higher than ever, it is crucial for dealers to diversify their capital within the dealership to maximize profitability.
Investing in inventory alone is no longer the driving force to achieve those numbers, but the investment into various profit centers will improve profitability per unit. Both diversification of capital and pairing the right unit with the right buyer in a virtual marketplace have become the new norm in staying ahead of the competition. Controlling working capital has always been something of a struggle for dealerships, as there is a huge cost to operate in comparison to minimal net margins.
There are two main controls in working capital that are imperative to focus on: physical assets and cash equivalent controls. Both are equally important to capitalize on max profitability.
Physical assets, or inventory, are the largest control variable. We erroneously think more cars equals more sales, but the pandemic has showed us that it’s not the number of units you have on your lot, but rather how fast they sell and provide a return on investment. This control not only cuts holding costs, which increases profit per unit, but ensures that each unit is treated as its own profit center. Cash equivalent is contracts in transit, accounts receivables, loans and time.
We often get far too caught up in focusing on sales metrics and fail to realize the expense of the main control. Deal desking, broken F&I processes, and ride and drive prior to all stipulations being met are time killers that eat into each individual unit’s profitability. The purpose is to control what you can through diversification and perfection.
Solid processes keep dealerships healthy and weather long-term turmoil within the industry.