Cash Flow Management for Auto Dealers: How to Boost Profits Amidst Disruptions

A version of this article was originally published by the MSADA

For automotive dealerships, maintaining a healthy cash flow has never been more crucial than in today’s era of fluctuating inventory and frequent supply chain disruptions. From semiconductor chip shortages to major infrastructure failures, the past few years have exposed vulnerabilities in the global auto supply chain. As an auto dealer, having robust cash management strategies in place can mean the difference between staying afloat or going under when the next disruption inevitably strikes.

At Albin, Randall & Bennet, when it comes to understanding and predicting our client’s challenges, we rely on our Auto Dealership Business Intelligence reports. One of our many resources for providing insights and strategies to clients, ADBI is a custom-designed, financial benchmarking tool that gives dealership clients a clearer picture of their operational statistics, their profitability, and areas of opportunity. Each report includes key statistics by department, but the real value is the customized comments and analysis from the ARB team. While no one tool or strategy can inoculate you completely against supply chain shocks, by combining data from our ADBI reports with the prudent measures we will discuss in this article, dealerships can improve resiliency and ensure they have the liquidity to weather any storm.

Here are some key cash flow tactics auto dealers may consider:

Optimize Inventory Levels

One emerging data point that our ADBI is showing is that frozen capital is starting to rise. Bloated inventories tie up large amounts of working capital that could be put to better use, especially in times of disruption. Dealerships should leverage data analytics and demand forecasting to maintain leaner inventory levels aligned with actual sales. When supply hiccups occur, prioritize inventory of your fastest-moving, highest-margin vehicle lines.

Rethink Vehicle Stocking Strategy

Another option for freeing up frozen capital is, rather than stocking large amounts of a few high-volume models, consider stocking fewer units across a wider array of trims and configurations based on customer demand data. This build-to-order approach results in lower working capital tied up on lots while better matching inventory to what customers actually want to purchase.

Reevaluate Floorplan Financing  

When supply disruptions restrict new vehicle supply, you may need to carry used vehicle inventory for longer periods. Scrutinize your floorplan financing arrangements to minimize costs of holding this inventory. Extending floorplan terms even briefly can provide a meaningful cash flow boost.

Leverage Data for Dynamic Pricing

When vehicle supply is constrained, you may be able to command higher prices and maintain margins. Closely monitor market data and competitive pricing analytics to dynamically adjust sticker prices based on real-time supply/demand conditions. Implementing disciplined pricing optimization can significantly boost cash flow during inventory shortages.

Accelerate Digital Sales Processes

Lengthy sales cycles tie up working capital unnecessarily. Accelerate the vehicle purchase process by enabling more digital retail experiences like online configurators, automated financing approvals, and contactless Pick-up. This gets vehicles off your lot and paid for faster.

Stay Close to Customers 

Maintaining open communication with customers about inventory constraints builds loyalty and can help you better forecast demand. Use analytics to identify your highest-value customers to prioritize for limited stock. Offer after-sale services like accessories to supplement revenue during supply shortfalls.

Explore Alternative Financing Sources

Traditional lenders may tighten credit if your cash flow is strained by disruptions. Evaluate opportunities to access capital from alternative lending sources like asset-based lenders, PE funds focused on auto retail, or fintech platforms matching investors directly with dealers. Diversifying funding sources provides a vital cash flow backstop.

Cut Operating Costs Aggressively 

Another issue our ADBI is tracking is an increase in expenses on average. Dealerships should identify ways to manage low-hanging fruit by reducing operating expenses like payroll, utilities, advertising, and other overhead during periods of supply chain strain. Doing so allows you to preserve more of your gross profits for servicing debt and other fixed obligations. No area should be off-limits when cash flow is tight.

In our globalized industry, no dealer is immune from supply chain disruptions and having to reevaluate their inventory expectations. Having ample cash reserves and a nimble cash flow management strategy can empower you to navigate these challenges far more effectively. It’s an essential part of building a truly resilient automotive business. Consult with your CPA regularly to develop a comprehensive cash management strategy that aligns with your dealership’s goals and priorities.

By Barton D. Haag, CPA