After the rapid growth of 2021 and 2022, auto dealerships are now operating in a more balanced market. While demand has stabilized, financial health remains strong. According to ARB’s Auto Dealer Business Intelligence (ADBI) database, the average New England dealership reported a current ratio of 1.70 on their December 2024 balance sheet, indicating a healthy level of liquidity. This presents an opportunity for dealers to put excess cash to work in ways that enhance profitability and strengthen operations.
Proper cash management is critical to maintaining stability and preparing for future market shifts. Dealerships that proactively manage their liquidity can take advantage of opportunities that may arise, whether through cost savings, investment growth, or operational improvements. Below are several strategic investment options to consider.
Floor Plan Paydown / Floor Plan Offset Accounts
Reducing floor plan financing is a straightforward way to improve financial stability and reduce interest costs. Since this type of debt represents a significant expense for dealerships, paying it down or depositing excess cash in an offset account can offer both immediate and long-term benefits.
- Fixed Return: Paying down the floor plan debt offers a guaranteed return equivalent to the current interest rate on the loan.
- Improved Financial Ratios: Lowering debt enhances the dealership’s balance sheet, potentially leading to better financing terms in the future.
- Sweep Arrangements: Implementing an overnight sweep arrangement allows excess cash to automatically reduce floor plan balances, optimizing interest savings without manual intervention.
By proactively managing floor plan debt, dealerships can lower their financing costs and improve their overall financial position. Additionally, reducing reliance on borrowed funds can increase financial flexibility during economic downturns.
Investment in Treasury Bills
For those looking to earn a return on excess cash without taking on unnecessary risk, Treasury bills provide a safe and flexible investment option. These government-backed securities allow dealers to preserve capital while generating predictable income.
- State Tax Exemption: Interest earned on Treasury bills is exempt from state income tax, enhancing the effective yield.
- Short-Term Commitment: With maturities ranging from a few days to a year, Treasury bills offer liquidity to meet unforeseen expenses.
- Laddering Strategy: By staggering the maturity dates of multiple Treasury bills, dealerships can maintain consistent cash flow while capitalizing on prevailing interest rates.
With their low risk and built-in flexibility, Treasury bills can be a valuable tool for dealerships seeking to maximize cash efficiency while maintaining liquidity. A well-structured Treasury investment strategy can also serve as a safeguard against potential market volatility.
Employee Bonuses and Incentives
Using excess cash to invest in employees can lead to long-term benefits in retention, morale, and overall dealership performance. Well-structured bonus and incentive programs can help dealerships retain top talent in an increasingly competitive job market.
- Tax Advantages: Employee bonuses are deductible expenses, reducing taxable income.
- Enhanced Retention: Competitive compensation packages improve employee retention, particularly among skilled technicians who are vital to operations.
- Morale and Productivity: Recognizing employee contributions boosts morale, which can translate into increased productivity and customer satisfaction.
By rewarding employees for their contributions, dealerships can strengthen their workforce and improve service quality, leading to higher customer satisfaction and repeat business. Investing in human capital not only enhances the dealership’s work environment but also contributes to long-term operational success.
Business Expansion and Enhancement
Reinvesting in business growth can provide dealerships with additional revenue streams and a stronger market position. Expanding service capacity, adding ancillary businesses, or acquiring additional locations can drive long-term profitability.
- Service Capacity: Adding service bays addresses increased demand for maintenance and repairs, generating additional revenue streams.
- Ancillary Services: Integrating services such as car washes or collision centers diversifies income sources and enhances customer convenience.
- Acquisitions: Purchasing additional dealerships expands market presence and can lead to economies of scale.
Strategic reinvestment in business operations can help dealerships stay competitive and position themselves for sustained success in the evolving automotive market. Growth-oriented investments can also build brand loyalty and create new revenue opportunities.
The Road Ahead
While the post-pandemic boom has tapered off, dealerships remain in a strong financial position. Rather than letting excess cash sit idle, dealers can use it to reduce debt, invest in secure financial instruments, support employees, and expand business operations. Each of these strategies not only puts cash to work but also strengthens the dealership’s long-term outlook. By leveraging resources like ARB’s ADBI database, dealerships can make informed decisions that maximize their financial strength and position them for long-term success. A well-planned approach to cash management ensures that dealerships remain agile, profitable, and prepared for whatever the future holds.
Dalton Myers joined ARB as an intern in 2016 and became a manager in 2022. He specializes in providing tax services to auto dealerships, individuals, and private client service.
