Computerized Monitoring of Your Used Inventory
By Bob Hinton
What is an acceptable end of year write-down of your used vehicle inventory? What should your wholesale losses be for the year? If you're like one of my clients, $350,000 in wholesale loss is the norm, along with a used car write-down of $50,000 or so every few months. Shocked? Pull out your thirteenth month adjustments and take a look. We're normally so happy with a lower tax bill that we forget how much our inventory was trimmed back to book.
What's the easiest way to monitor your used inventory? I have a four-step, high tech process that "drills down" to potential inventory valuation problems.
Step 1 - Do you carry too much inventory? This is simple and doesn't even require a computer like the next three steps do. Just look at your cost of sales for last month - used cars and trucks retail. Take last month's gross profit, less the sales amount on the financial statement. Don't use wholesale sales. For my dealer, it's about $500,000. Now double that, for an even $1,000,000. If I peek on the front page, his inventory should be somewhere between those two amounts. He fails - it's $1.5 Million.
Step 2 - Do you carry what sells? Apply the 30-70% rule. Take the top 30% of your sales for last month and summarize them. Here are his results.
For my dealer, 18 deals are about 30% of his sales. I downloaded his whole car deal file into Excel and then used the AutoFilter function to find just the used deals and the custom filter on the GROS PFT and DAYS columns to find the best gross profit with the least amount of days in stock. Looking at this list, 70% of his inventory should be Nissans, Toyotas or Trucks. Next I downloaded his inventory. He had about 27% in Nissans and Toyotas and less than 10% in Trucks. To make this chore easier, use the Subtotal function of Excel to summarize your inventory. For every change in CARLINE or Model, count the Model column. Having only 37% in what does the best for him isn't good. Another problem is the self-fulfilling prophecy. If you have lots of widgets in stock - you sell widgets. To avoid getting caught in this trap consider the services of R.L. Polk and Company. They have products that can predict what the local market is looking for with their Auto Tracker Used Vehicle Statistical Report. It makes sure that your used vehicle inventory is stocked with the models that your customers are looking for. With Polk's Auto Tracker Used Vehicle Statistical Report, you'll gain specific insight into what's selling in your market. By customizing your reports you can better manage your inventory, benchmark your sales, and gear your marketing efforts towards what's hot right now.
Step 3 - Are your Used Vehicles priced correctly? Unless you are a speed user of Kelley Blue Books or the NADA Used Car Guide, I recommend that you use a computerized service to price your inventory. There are at least two companies that do this for a small fee: www.maxisre search.com and www.vintek.com. These two operate in the same way-the difference is the extent that you want your inventory analyzed. I use Vintek-it's simple. I download the inventory and email it to them. They email back an Excel spreadsheet with the auction price for each vehicle. It's going to be 10-15% lower than true book due to a lack of equipment adds, but you'll have an overall estimate. Maxis Research does a more comprehensive set of reports called "Inventory Watch." They dial into your in-house computer system and extract much more data and combine it with auction reports to provide you with valuations and ordering guides. Regardless which of these three services you use, having a computerized 2nd opinion always helps.
Step 4 - Investigate your exceptions. This is the final drill down to your problems. When you look at your top 30% car deals, also look at the bottom 30%. Where did these cars come from? Did you purchase them or were they trade-ins? In our case study, they came in trade from the new car department and were "out of line" - or non-Nissan cars. The dealer started a policy that non-import trade-ins were to be taken to the auction and any loss applied to the new car deal. After looking at the wholesale losses we found the same problem and another problem. Most of these vehicles had extensive work done in the shop. Not only did the shop keep them for over 30 days, the cost of repairs put the cars over book value. Another new policy - used cars requiring extensive repairs were wholesaled immediately.
What's the end of the story? This past year, my client has less than $10,000 in wholesale loss and his latest Vintek report has him only 17% over auction value. He still carries too much inventory, but at least there is less "water" in the value and no more write-downs. Editor's note: Changes were made to the above data to protect the identity of the client.
Bob Hinton is partner and director of Dealership Services for Moss Adams, LLP. bhinton@dealeronline.com
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