In dealership business, a floor plan is a loan for your vehicle inventory which you use to finance the vehicles on your floor. You may attain it from a bank or from numerous dealer floor providers that will provide financing for your inventory. After you attain it one way or the other, then you may purchase your inventory with your dealer floor plan. By selling a vehicle, the bank will ask you to pay off the portion of the loan that was used to purchase that vehicle.
For instance, you purchased a vehicle at an auction for $10,000 and then sold it the following week for $15,000. You have to pay your bank $10,000 with interest, and you’ll keep the $5,000 profit. Your bank will charge you a certain amount of monthly interest for the unpaid balance every month. In this case, if you carry an average balance of $50,000 on your dealer floor plan, the bank could ask of your interest payment that amount to $350 per month.
Formulas for effective inventory management
To ensure your dealership is successfully and effectively managing its current inventory and cash flow, you should learn these finance formulas below.
1. Stocking the inventory
Let’s say you want to sell 100 units per month. Under the assumption the average turn time is 40 days, your inventory would be turned nine times a year. Check out how this floor plan finance formula works:
Monthly Desired Sales 100
Total Yearly Lot Turn (Assuming a 40-day average turn time) ÷ 9
Months in the Year X 12
Optimal Inventory Stocking Number = 133 Units
In other words, you would need to stock 133 units based on 100 desired sales per month and a 40-day average turn time.
2. Calculate your sales
If you know the target sales number, you should take your current inventory into consideration. It can help you determine if you’re overstocked or if the desired sales number per month is realistic. To see what is the number of desired sales, check out the formula below:
Units in Stock 160
Total Yearly Lot Turn (Assuming a 40 day average turn time) X 9
Months in the Year ÷ 12
Optimal Number of Sales Per Month = 120 Sales
So, you will have to make 120 sales per month based on the total number of units having in stock.
3. Cost of unit holding
Having a unit sitting on a lot costs you money. Therefore, it’s important to know the holding cost per day. That helps you to determine what units need to be turned quickly, which of them can sit for a while, and which ones should be sold at auction. Before checking out the formula, you’ll have to have a good handle on total dealership expenses and inventory for the whole month.
Total Monthly Expenses $169,568
Monthly Selling Expenses – $62,759
Monthly Holding Cost = $106,809
To determine the monthly holding cost per unit, divide the monthly holding cost by the number of retail units in stock for the month. From the previous example, you have 133 units in stock.
Monthly Holding Cost $106,809
Units In Stock This Month ÷ 133 Units
Monthly Holding Cost Per Unit = $803,07
To calculate the holding cost unit per day, divide the result from above by the number of selling days in a particular month. In most cases, the number of selling days, or days when the dealership is open and making sales, is 24.
Monthly Holding Cost Per Unit $803,07
Selling Days Available ÷ 24 Units
Holding Cost Per Unit Per Day = $33,46
Most common floor planning mistakes
Calculate your stocking number, sales, and the cost of unit holding is easy, but that not enough to be successful. Even though floor planning seems like a fundamental process, there are so many factors that are out of the dealer’s control. For example, economy and auction prices are not something dealer can control. However, they’re crucial when talking about the success of a dealership business.
Without any doubt, cash flow is key to being successful in this business. It determines everything from advertising and staffing. Not to mention it has an enormous impact on your relationship with creditors. A lot of dealers aren’t aware that a lot of the bills mature at the same time which can result in debts.
Another issue many dealers are facing is not being aware of the status of their product. Can some things be replaced to increase the value of the vehicle? Always keep in mind what can be improved to attract potential customers. Even the smallest details can affect the overall product. Take Ford’s car keys for example. They’ve been using key fobs to unlock their cars and truck since 1993. After a while, their keys need new batteries. Changing that small detail to improve customer experience can positively affect your chances for selling.
Solution: Control your floor plan costs
What does it mean to control your floor plan costs? You should start by keeping good and accurate records and know which products sell the best in your market. Manage and monitor your unit days’ supplies. If you have availability that exceeds your limit, don’t order.
Managing the inventory aging is vital. If you want to have a net credit balance in that floor plan account, you will have to eliminate aged inventory. You will have to identify products that have been in inventory for more than 90 days. It may not seem like the easiest process after all, but being responsible and honest always helps. In dealership business, everything is about trust. If you want your customers to trust you, first your floor plan provider will have to trust you.
