The Top 5 Floor-Planning Mistakes Dealers Make
When it comes down to it, floor planning in its essence is a very basic process: you open a line of credit, purchase inventory with that credit, sell the inventory, and pay back the loan. Intertwined among the basics are a lot of moving parts that at times can cause complications. While there are many variables beyond the dealer’s control, from the economy to auction prices, there are a few that can be controlled and which are essential in driving success. It’s therefore important to understand the five most common floor-planning mistakes that dealers can make:
1. Mismanaging Cash Flow
“Cash is king” whether you’re running a deli or buying and selling in the automotive industry. Cash flow is the number-one key to a successful business. It can positively and negatively affect everything from advertising and staffing to acquiring business tools and improving facilities. And what’s more, it certainly can impact your relationship with your creditors.
One of the benefits of floor planning is that it frees up cash for other expenses and business investments. Purchasing inventory with cash will limit a dealer’s options to keep their money working for the business. When a dealer uses a floor plan, they have more options available than if they had paid cash. With a floor plan, a dealer can pay a small amount of the car off at a time, they can extend a vehicle, or they can buy down their depreciation over a period of time. With a floor plan, a dealer has extra capital on hand to ensure their ability to purchase more inventory.
A dealer’s budget for stocking inventory should be around a 70/30 mix of their floor plan and cash, respectively. Using a floor plan to stock inventory ensures a dealer can buy enough vehicles to meet the needs of their market, and the cash on hand ensures a dealer can pay for their expenses.
However, a common mistake is not taking into account that many of these bills mature at the same time. Improper cash management may cause dealers to get into a borrowing cycle that provides little wiggle room and thus creates a shell game of constantly shifting cash from one debt to another.
2. Over-Extending
The automotive industry is full of companies that provide lines of credit for purchasing inventory; in fact, there are nearly 200 in the U.S. currently. It’s important to manage your line of credit so that you can grow your business responsibly. One scenario that happens far too often is dealers over-extending themselves when it comes to inventory. When you purchase more inventory than you can sell, you put yourself at risk if you can’t make the payments.
Moral of the story: Just because you are approved for a $250,000 line of credit doesn’t mean you have to go out and spend it all at the next auction. Buy in proportion to your sales figures.
3. Communicating Inadequately
No business likes surprises, especially finance companies. You should strive to keep your floor plan