Managing Your Interest Costs

Managing Your Interest Costs

For many years, dealers have had the luxury of operating in a low interest environment. Optimization of cash flow was left to those dealers who were either under-capitalized (and had no option), or well-versed and disciplined in asset and cash management techniques, thus taking advantage of optimizing their cash flow and relentlessly reducing their borrowings.

But, as interest rates rise, the cost of not aggressively managing your assets increases. There are a number of asset management strategies that dealers need to consider in order to free up cash flow and use this new found cash flow to offset their higher interest burden.

Floor plan interest
Floor plan interest is not a function of expense control, but rather a function of asset management. The dealership has very little control over the rate charged on flooring, but it does have control over the amount of inventory to stock. When ordering new vehicles, be disciplined and objective, and learn to say “no.” Create a worksheet to track all models by units on hand, what is on order and in the pipeline, and what you realistically think you will sell. Remember, if you need to buy some slow moving units, you can easily obtain them from your competitors who probably have more than they need and would be happy to lighten their inventory. The rule is simple – the higher your inventory turn, the lower your floor plan costs.

Cycle time management
Cycle time is the amount of time it takes from the date of delivery of a vehicle to the date you receive your money. Convert all sales transactions into cash as soon as possible and make every effort to pay off your sold vehicles immediately upon delivery. There is no such thing as “floating” on your floor plan provider, as you are charged interest on all of your unpaid balances 24/7. So, if you have money in the bank and it is earning less interest than you are being charged on floor plan, opt for the wiser choice of paying off your vehicles.

How do you accelerate cycle time? There are four components to measure and monitor.
• Sale to delivery date
• Sale to processed into accounting date
• Sale to proceeds received date
• Sale to paying off flooring date

A deal analysis form is used to monitor the above events and it isolates where there is an opportunity to improve the velocity of your cash flow. I have asked a number of dealers over the years to pull a representative sample of deals – especially those processed close to the month end – so they can see where they need to tighten up and streamline the deal flow. If you would like a copy of the deal analysis form, please e-mail me.

Create the necessary urgency to quickly convert the sale transaction into cash. This requires managers – especially in F&I – to be on the ball and understand the importance of structuring deals correctly the first time and sending them to the accounting office on a daily basis.

Turn your daily “save a deal meeting” into a “cash a deal meeting” as well by having someone from the accounting office present at this meeting with a list of deals not yet turned into accounting, as well as those that have been turned into accounting but cannot be converted into cash.

Ask the variable managers to treat every day like it is the end of the month. Consider setting a bonus – to be shared by the F&I manager and the contract desk clerk – that will decrease the time lag to only a couple of days, and poof, somehow deals flow quicker with fewer mistakes and there is now additional cash flow available to reduce your floor plan costs.

Looking at the NCM database we see some interesting trends regarding floor plan interest. Statistics for “All Dealers” show that floor plan interest on average is up over 100 percent over June YTD of the previous year, while our benchmark “All Dealers” dealers are up close to 55 percent. The franchise segment that has jumped up the most – our segments include hi-line imports, regular imports and domestic – is the average hi- line imports category. It is interesting that the most profitable franchise segment is performing poorly against its peers in this metric.

Bottom line – good habits are created in bad times and bad habits in good times. We have not only had good times and hopefully become well capitalized over an extended period, but we’ve also probably become complacent, especially when it comes to managing our assets. Now is the time to act as if you are undercapitalized by speeding up the conversion of transactions into cash.

This article by Jeff Sacks originally appeared in Dealer Magazine.

Jeff Sacks, president of Jeff Sacks & Associates, is an auto industry speaker, consultant and trainer and is actively involved with dealership and OEM consulting and training.
His website is www.jeffsacksauto.com and his phone number is 800-867-2160.