The Key to a Higher Gross Average in Sub-Prime Finance-Inventory Management
By Chris Leedom
I recently had the opportunity to hear a dealer answer what I felt was a very thoughtful question. It is worth repeating because virtually all dealers can benefit by hearing the message again.
A very good friend, Dealer X, was asked how he consistently maintains sub-prime gross profit averages of more than $2,500 per unit. The dealers asking the questions were convinced there had to be some sort of foul play. The good news was there was not. He explained his secret as follows.
Dealer X starts with essentially the same lender arrangements, customer qualifications and down payment as any other dealer. His area of focus is the inventory unit. He spends an enormous amount of time in the acquisition, reconditioning and management of inventory. The key goes beyond just buying a unit "behind book". It is knowing the proper reconditioning amount to prepare the unit for sale. It is also being disciplined enough to acquire the right cars at the right prices. Anyone can walk in a lane and be top bidder on a vehicle. It takes some skill, effort and a little luck to acquire units at attractive valuations. But this dealer knows that this is not the be-all and end-all of his business.
The key is in the turn of these units. Let's say you acquire a particular vehicle $750 behind NADA trade value. Now you recondition and prepare the unit for sale and it is still $150 behind book. The valuation figures in the book depreciate at the rate of approximately $200 to $250 per month. Therefore the quick inventory turn of sub-prime inventory units is even more critical than "regular" units because, unlike the conventional business, there is no opportunity simply to "gross our way out of them." The lender dictates what the unit will be worth by virtue of the valuation guide. That is never going to change guys and gals. So inventory management becomes critical. Thus, fast inventory turn preserves higher gross profit opportunity.
We don't have space in this article to go through all of the technical formulas for calculating inventory turn based on dollars and units. You can obtain all of this information for free at independentdealer.com. All content is free to dealers: just click on the inventory section. The important point is to track your indicators on a regular basis. The result will be higher gross profits per unit.
On a more personal note, I have accepted an opportunity to head up U.S. operations for CarBiz.com. Mike Roscoe has afforded me the privilege of continued articles in this publication, so we will look forward to keeping you posted on all kinds of developments in the sub-prime business. Watch for the annual National Special Finance and Buy Here-Pay Here Conference to be held in Las Vegas, October 22-24, 2000.
We hope to see you there. Thank you and good luck, until next time.
Christopher M. Leedom is the Executive Vice President for CarBiz.com and co-founder of IndependentDealer.com. He also moderates Dealer Twenty Groups and is based in Sarasota, Florida. He is a recognized industry expert and trainer for sub-prime finance and is the Chairman and Founder of the National Special Finance and Buy-here Pay-here Conference. cleedom@dealeronline.com
