Profit Found in Solid Inventory Profit

We’ve all heard the saying, “The profit is made when you buy the car.” What does this really mean? In our realm of special finance, we are besieged with customers trying to buy our stock of vehicles that we worked so hard to buy and buy right. We have bought really nice clean cars. We have scoured the auctions, weeded through the trade-ins and worked every wholesaler we know to the bone in order to buy the vehicles right because, we all know the profit is made when the car is bought.

Well, this may not necessarily be the case. We may have the right idea in buying cars and may be able to secure some great buys; however, we must remember who our customers are. I see a great car buyer buying the wrong type of vehicles repeatedly. While you may think the dealership is buying some nice cars and getting good deals on them, there is just one problem; they are buying the wrong type of car.

One of the most common problems in special finance is the getting the mix of proper inventory to match lender criteria. Quite often, a dealer will decide he is going to get into this realm of credit-challenged customers and then treats the business as an afterthought. The headaches of this realm are frequent because every customer has bad credit; however, the profit that can be made in this business can offset these headaches.

In other words, this is not the easiest business in the world, and it has its share of stress. One of the basics to making high grosses is to have the proper inventory and, of course, be in it under book. In analyzing proper inventory for the special finance customer, one of the most important moves we can make is to see what structure the lenders want us to meet. Here are some facts in this segment:
1. 80 percent of all funded deals have payments under $400 per month
2. 80 percent of all purchased units should be in the $7,000 to $12,000 ACV range
3. Purchased vehicles should be “lot ready” at least $500 back of NADA book
4. 80 percent of vehicles should have under 50,000 miles
5. Units should be priced to have payments at 20 percent or less of your customer’s gross income

There are challenges and pitfalls in being a used car manager. One tendency is to get emotionally attached to certain makes and models. The type of car described above is not generally a very “exciting” unit.

Another pitfall is that many used car managers don’t understand the lender guidelines and desking techniques in special finance. It is imperative that the person buying the units for the SF department understand how critical lender guidelines are. Make sure the special finance manager and the used car manager are working on the same page.

High-mileage units are a constant problem. Remember, one of the key attributes of SF inventory is keeping 80 percent of the vehicles under 50,000 miles. When mileage goes over the 50K mark, lenders really start reining in the term that they allow on the deal, which increases the payments. Then to get the payment in line with what the customer can afford and/or what the lender has qualified, the gross must be cut. Soon your profits have disappeared, and a disaster remains.

Systems and processes are the key components to having a profitable special finance department. However, even with the best processes in the world, you must have the right type of inventory or you will not hit the target gross you’re after.

Inventory is not like fine wine; it doesn’t get better with age. Processes must be in place to make sure the inventory turns on a constant basis. This is critical! Target performance should be to have a 30- to 45-day supply of vehicles on hand. This means that if the dealership is selling 100 units per month, your inventory needs to be between 100 and 150 units. If more units are stocked, an aging problem will begin, compound and become more complicated every month. This is when grosses start to deteriorate, causing the whole system to cave. In many instances, this is the beginning of the end.

It has been said that the salespeople are the lifeblood of our dealerships. If this is the case, then the inventory is the food that feeds our dealerships. We don’t want to eat the wrong food, or worse eat stale rotten food. We want healthy, clean and fresh food. This inventory will make us the most money and keep our staff and customers happy. Remember, it’s not just that the profit is made when you buy the car; the profit is made when you buy the right car!