The car dealer’s cash-flow conundrum

Although many dealers are reporting a strong opening to the year, and some even doing so well they are exclaiming ‘what recession?!’ the task facing many dealers who sell new cars is to unlock the capital in their ‘fully paid’ cars. These are cars which have now exceeded the time that they have been on a “funding plan” and have now been paid for by the dealer. The system for stocking and selling new cars varies slightly depending on the manufacturer being represented, but the dramatic fall in sales of new cars, especially in the last quarter of 2008, has meant that all the dealers carrying this kind of stock who have not managed to sell it will have potentially millions of pounds tied up. This will badly affect their ability to re-invest that money into fresh new stock which they can turn and make a profit on.

The conundrum facing these dealers is that they will have often paid for this stock at last year’s prices. Although many manufacturers are assisting in offering financial incentives to sell more cars, the fact remains that when many customers look at the huge savings they can make on a nearly new used car – which as we have reported many times can be in some cases more than £20,000 on some high end models but big advantages on nearly any model in today’s market – it is hardly surprising that dealers cash flow is being severely restricted.

If you take an average dealer representing a large car maker it is reckoned they will have somewhere in the region of 10 “fully paid” cars and at, for example £10,000 per car as an average, that’s £100,000 which is tied up. If you then multiply this conservative estimate across the thousands of franchised dealers around the country the impact will stretch into many millions of pounds which can only be reduced by selling this stock.

The situation will clearly have an even greater affect on large dealer groups with multi-franchise operations and the huge overheads that go with these businesses. Put simply, in the next few months with used car stock becoming increasingly hard for dealers to source at current levels and prices, customers will be able to enjoy large discounts on new cars as dealers and manufacturers look to release cash and get the new car market going again. We have found recently that many dealers are not even starting with the list price when introducing potential customers to their product but rather a heavily discounted opening offer just to get the ball rolling with negotiations.

What does this mean for the customer? Well with some persistence a customer could, in the coming months, drive away with the bona fide ”deal of a lifetime” when they buy a new car!