How Can Less Inventory = More Profit?

One of the most important success factors for your business is the effective management of your dealerships inventory.  This is no small task in the recreational products industry because of the seasonality of most of the products you sell and, of course, none of us have control over Mother Nature!  However, there are a number of “tricks of the trade” you need to know that can help you maintain the ideal inventory to maximize profits. 

It is critical to understand how your units, parts and accessories inventories can affect your bottom line.  Poorly managed inventory can represent an enormous cost to your dealership! So, here are my top 7 ways in which poor inventory control can kill your profits.

  1.     Excessive floor plan interest expense on carryover unit inventory
  2.     Wholesale credit lines tied up with unit carryover preventing you from purchasing new product for the current season
  3.     Operating lines of credit tied up by excessive parts and accessories inventory that will not move until the next year
  4.     Storage costs on inventory that will not move until the next season
  5.     Security expense to protect carryover inventory
  6.     Inflated Insurance expense because it is typically calculated on the highest balance outstanding on unit inventory
  7.     Deflated margins on non current unit sales

Controlling inventory is an art that takes a thorough understanding or your business history, analysis of the market, economic conditions, planning and yes a little luck. The following are a few steps you can take to tip the scales in your favour when purchasing inventory.

Step 1:  When I am working with a dealer to prepare a business plan we always start with the next year’s sales forecast.  Most dealers can tell me the number of units they sold last year but the trick is to take that to the next level.  I ask them to give me the number of units they sold in each product group by month. 

If you can do this for the last 2 or 3 years you be amazed at how much of an eye opener this can be.  When planning your purchases for the next season it is invaluable to look at your trends by month as opposed to just how many units you sold in the year.  Patterns begin to emerge and this can help give you confidence on booking the right number of units for next year.

Step 2:  Calculating your annual inventory turns is the next thing you can do to zero in on the right inventory to maximize profits.  Compare your turns to the industry standard for profitable dealers and you will get a good feel for how you fit into the matrix. I Have this information and can help you with these industry comparisons.

Step 3:  Analyze your finance company’s monthly statement to ensure you know exactly what units are still on free floor plan versus those that are costing you interest.  For large volume dealers it is extremely important that your sales staff are employing the FIFO (first in first out) principle for pulling inventory for a customer sale. Your objective should be to minimize carryover.

Step 4:  Calculate your Interest & Bank Charges as a percentage of gross sales.  Compare this to industry standards for profitable dealers and you will quickly know whether you are carrying over too much inventory. 

Step 5:  Never let emotion work its way into your inventory purchases.  It is easy to get caught up with a new product line release or volume rebates based on the number of units you purchase, but this means nothing if you end up paying interest until the next season. Just because someone says you should sell 100 units in a particular product group doesn’t make it so! 

Put these 5 steps into practice and use them to make wise inventory purchases to minimize carryover and all the related expenses that come with it.

Healthy inventory that turns in accordance with industry standards is one of the main keys to your profitability at the end of the year.  If you have concerns about your inventory practices and the impact of this on your profitability, please contact me for a free consultation.

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