How To Avoid Excessive Season Ending Inventory

Are you worried that you still have too many units in stock as the summer season winds down?  Managing inventory is no easy task because of the seasonality of most of the products you sell. However, there are a number of tricks of the trade that can help you maintain your ideal inventory to maximize profits. 

It is important to first understand how your unit inventory can affect your bottom line.  Poorly managed inventory can represent an enormous cost to your business as shown in the following list:

  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 of 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 purchase inventory.

Step 1:  It is important to understand the relationship of your unit inventory to your annual sales.  I have found that a rule of thumb to maximize sales and minimize floor plan interest is to have an average inventory balance that is 50% of your annual cost of sales. 

You can track this easily through your business plan by recording your inventory by product group by month at the top of your plan spread sheet.  Let’s say for example you sell $500,000 in street motorcycles and your inventory never dips below $550,000 all year long, then you have a big problem. 

Your inventory should peak at the beginning of the season to let say $600,000 and then liquidate down to around $150,000 at the end of the season.  The net effect we are looking for is your annual average inventory should calculate at $250,000.   The first thing I look at when analyzing a dealer’s inventory is how much is there in stock versus the annual sales. 

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.  This calculation will further support your results from Step 1.

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 larger volume dealers who have significant numbers of the same models, it is extremely important that your sales staff are employing the FIFO (first in first out) principle for pulling inventory for a customer sale.  The objective is to minimize unnecessary interest expense and unit 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 and/or you have too much non-current inventory.  Again, this will verify the results from the first three Steps.

Step 5:  Never let emotion work its way into your inventory purchases.  It is easy to get caught up in the excitement of a new product line release or volume rebates based on the number of units you purchase. 

Getting those extra rebates will mean nothing if you end up carrying over excessive inventory and paying interest until the next season.  Knowing your market and the number of units you can reasonably expect to sell should be the driving force to purchasing your inventory.

Just because someone says you should sell 100 units in a particular product group doesn’t make it so.  Put these steps into practice and use them to make wise inventory purchases to minimize carryover and all the related expenses that come with it.  You can also apply this same theory to your parts and accessories inventory.

Healthy inventory that turns in accordance with industry standards is one of the main keys to your profitability at the end of the year.  We want to maximize your sales and margins while minimizing the related expenses.  If you have concerns about you inventory, contact me for a free consultation.

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