The “Cost of Doing Business”

Did you know that a car dealership with a 100 unit inventory, with an average unit cost of $30,000 creates approximately $679 per day in “holding costs”??The hidden cost of managing used vehicle inventory "Holding Cost" (i.e. The Cost of Doing Business), is a cost that can slowly "paper-cut" a used car department into submission, if not managed correctly.

AccuTrade (A Cars Commerce Solution) focuses on increasing appraisal acceleration to accurately increase the speed of acquisition with used vehicle inventory, by acquiring inventory at a profitable retail or wholesale value. This reduces the amount spent on a daily basis regarding daily holding costs, which are often avoidable excess profit evaporation.

So what are holding costs exactly? And what is the calculation to determine holding costs? I did not learn these lessons until later in my career, but I wish someone had shared them with me sooner:

• Holding costs, also known as Carrying Costs, refer to the expenses incurred by a dealership to maintain inventory over a period of time. In auto dealerships, holding costs can significantly impact profitability. This factor has been amplified over the past few years. Holding Costs also include various expenses such as depreciation, insurance, storage, and opportunity costs associated with having capital tied up in inventory.

Components of Holding Costs

1. Depreciation: Vehicles lose value over time, and this depreciation is a major component of holding costs. Currently the market has significant volatility. EV price changes without notice, certain OEMs changing their MSRPs is becoming a new form of dealer cash, etc. Basically, the longer a car remains in inventory unsold, the more it depreciates. On average, a used vehicle no longer retains front end margin after 32 days. This timeframe is often cut in half with many electric vehicles.
2. Insurance: Dealerships need to insure their inventory against theft, damage, and other risks. Insurance premiums contribute to holding costs, as well as outsourced security in certain instances.?
3. Rent/Storage Costs: This includes the cost of renting or owning the space where vehicles are stored. Occupying parking spaces with less desirable inventory, that does not generate revenue as quickly as more desirable inventory. As inventory days supply increases, overflow/off-site storage lots become more necessary, as inventory turn slows down.?
4. Floorplan Costs: If a dealership uses loans or lines of credit to purchase inventory, the interest paid on these financial instruments constitutes part of the holding costs in the form of floorplan interest.
5. Opportunity Costs: The capital invested in unsold vehicles could be used elsewhere for potentially higher returns. The lost potential income from other investments is considered an opportunity cost. Tying up inventory capital with less desirable inventory prevents dealerships from reinvesting that capital into more desirable, & faster turning inventory.?
6. Maintenance Costs: Maintaining vehicles to keep vehicles front line ready? also adds to the holding costs. This includes additional detailing, fuel cost, vehicles breaking down while in inventory, flat spots on tires, dead battery replacements, etc.

Calculation of Holding Costs

To calculate holding costs for a car dealership,? sum up the costs from the various elements mentioned above. Here is a simplified example to demonstrate the calculation:

Depreciation Cost:

• Monthly depreciation per vehicle = 1% of $30,000 = $300
• Total depreciation cost = 100 vehicles * $300 = $30,000

Insurance Cost:

• Total insurance cost = 100 vehicles * $50 = $5,000

Rent/Storage Costs:

• Total storage cost = $5,000

Floorplan Costs:

• Monthly floorplan cost per vehicle = 0.33% of $30,000 = $99
• Total floorplan cost = 100 vehicles * $99 = $9,900

Opportunity Costs:

• Monthly opportunity cost per vehicle = 0.5% of $30,000 = $150
• Total opportunity cost = 100 vehicles * $150 = $15,000

Maintenance Costs:

• Total maintenance cost = 100 vehicles * $30 = $3,000

Total Monthly Holding Costs:

Summing up all the components:

• Depreciation Cost: $30,000
• Insurance Cost: $5,000
• Rent/Storage Costs: $5,000
• Floorplan Costs: $9,900
• Opportunity Costs: $15,000
• Maintenance Costs: $3,000

Total Monthly Holding Costs for 100 unit inventory = $67,900

Tommy Gibbs once told me, "It's not the big that eat the small. It's the fast that eat the slow." That statement has never been more true, than it is today...