Inventory Turn Really Is King

Originally Published October 2007
We often say “Cash is King”, and then we go looking for it. Usually, we find it right on the lot. It is all that aged inventory. You know the stuff you don’t want to lose any money on because you can “Retail Out of It”.
The fact is that you may make one homerun in a lifetime on a unit that has had a Birthday, but odds are that you will see serious lot rot and recondition the car 2 or 3 times before you recapture your initial investment. That is why Inventory Turn makes Cash King.
Now most of are going to tell me I am crazy, but the ideal inventory level is less than a 30 Day-Supply. Yes, this does mean working your Used Car Manager harder, locating and merchandising more units, but it means greater profits for you.
As you well know, you get your best gross on your freshest units. Many of the Large National firms use the bucket system which looks something like this:
Up to 21 Days in Inventory Markup $3,000
21 to 30 Days in Inventory Markup $2,000
31 to 45 Days in Inventory Markup $1,000
45 to 60 Days in Inventory Markup $ 500
Over 60 Days in Inventory Wholesale
By the way — Days in Inventory is from the Date Received, not the Date Out of Recon.
As you can see by the example above, the large chains have learned that a car is like an open bottle of wine. It needs a little time to air, but quickly turns to vinegar if left on the shelf too long.
So, what does this have to do with a 30 Day-Supply and Cash?
Let’s look at an example of what turn does for How Much Gross Profit Per $1,000 Cash Invested (ROI for those Accounting folks).
To do this we need to make a few assumptions:
- Average Cost of Inventory is $15,000 per Unit.
- Average Selling Gross Profit is $1,200
- Average F&I Gross Profit is $1,000
Days Supply |
30 |
45 |
60 |
90 |
120 |
|
|
|
|
|
|
Inventory |
15,000 |
15,000 |
15,000 |
15,000 |
15,000 |
Front GP |
1,200 |
1,200 |
1,200 |
1,200 |
1,200 |
Back GP |
1,000 |
1,000 |
1,000 |
1,000 |
1 ,000 |
Total GP |
2,200 |
2,200 |
2,200 |
2,200 |
2,200 |
GP% |
14.67% |
14.67% |
14.67% |
14.67% |
14.67% |
Turns/Yr |
12 |
8 |
6 |
4 |
3 |
GP% Annualized |
176% |
117% |
88% |
57% |
44% |
Annualized GP |
26,400 |
17,600 |
13,200 |
8,800 |
6,600 |
As you can clearly see, the greater the number of turns or “velocity”, the more Gross Profit you have at the end of the year.
Does this mean you can afford to take a loss on that “Birthday Special”, you know the one with the “Gray Beard”? Absolutely…. In fact, you cannot afford not to take the loss. That unit is costing you profit opportunities. For no matter what your average PVR is, the longer you keep the car, the fewer times at bat you will have with your hard -earned cash.
Yes… Cash may King, but the real king is inventory turn. If you fail to do so you may as well invest under your mattress.
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