Used vehicle frozen capital is the dollar amount of used car and truck inventory over 60 days old. Frozen capital in the used car department can impact the entire dealership. Cash becomes frozen primarily for two reasons: 1) when dealers do not maintain and enforce a written used vehicle wholesale policy, and 2) when dealers lack an effective policy to control the aging of their retail inventory.
How to Measure Your Used Vehicle Frozen Capital
One way to measure or calculate this number is to compare your last month total cost of sales against your ending inventory dollar value. For example, if the last month cost of sale for used car retail and used car wholesale is $250,000 and your ending inventory is $300,000, you have $50,000 in frozen capital. Part of the $50,000 problem is how your dealership handles aged and/or very low cost vehicles.
One dealer who made a comparison between his average used-vehicle monthly cost of sale value and the average inventory value of the stocked units found that his frozen capital calculation indicated a difference in excess of $3,000, meaning the dealership had some very cheap units in stock. The used car printout revealed that the store had four one-dollar units in stock. Two of them were two months old, one was 30 days old and one was current (actually 22 days into the month). So much for having an in-practice used car wholesale policy.
How to Modify Your Used Vehicle Frozen Capital
As a result of the calculation, the dealer read the aged vehicle inventory printout and told his managers, "Our policy is to remove all cheap units on the lot or in inventory by month end." Some wholesalers would buy units and then leave them on the lot for a period of time while they shopped the unit to other dealers, even one-dollar units.
I suggest that you and your used car manager walk the lot with the used car and truck aged inventory printout in hand. Touch every unit as you go down the line. Check off each stock number until you have verified the inventory schedule. How many units are getting close to 60 days old? How many cheap units, those you will not retail, are still on the lot?
Modify your advertising to sell these aged units. Finally, verify the actual wholesale delivery of the units identified for wholesale.
How to Monitor Your Used Vehicle Frozen Capital
The best way to monitor your used vehicle inventory is by requesting a printout of the used car aged inventory from your office on a weekly basis. Read this by yourself and then with your managers.
One dealer emphasized the need for profitability in every department, in every month, to all of his managers. That was why he was in business. However, his used car manager had this profitability issue pounded into his head so hard that he withheld seven wholesale units from billing at the end of the month, because he did not want to disappoint the dealer. The dealer had stressed profitability so much, that the manager was afraid to submit these sales which would have put him in a very bad light. Be aware that your stressing profit to your managers can affect not only the individual department operation, but also your entire dealership management attitude.
One caution regarding this policy: Watch that a knowledgeable manager, knowing you can read the printout, doesn't sell and then buy back wholesale units that were previously wholesaled. One general manager knew of the dealer's ability to read the financial statement and the detailed records of the company. The GM complied with the "aged car" policy by selling the deadline units to some wholesaler friends. However, he told them, "Don't put too many miles on the units and I will buy them back from you in 15 days." This churning of stock removed the old stock number from the books, and a new one assigned when the buy-back was completed. The only person that really knew what was going on was the title clerk who saw the assignment to the wholesaler and then a re-assignment to the dealership. But she didn't say anything to the dealer. The dealer did not find out until after the GM left for a position in another dealership.
Conclusion
Dealers need to strictly adhere to a policy regarding aged vehicles. Don't fall in love with metal and rubber and end up buying birthday candles for your favorite auction purchases. Walk the lot with an inventory printout. If a unit is more than 45 days old, sell it by the end of the month. If you want to retain the unit, be willing to administer a write down adjustment of at least 15%. The sales manager's monthly bonus should then be adjusted accordingly.
Fred Samuelson is the chairman of the board for MRI Associates, which provides financial statement analysis for the automobile dealer community. MRI also works hands-on, in-house with dealers to set up policies and procedures to correct inefficient operations, and provides follow-up phone coaching for selected managers.