When QCEP reviews a dealership’s business operations, one of the areas we focus on is utilization of capital. Specifically, we’re looking for “frozen” capital, which is defined as money tied up in assets that exceed recommended industry guidelines. Put another way, frozen capital is an asset that isn’t being allocated efficiently.
But frozen capital is not just about money. There’s also human capital, a precious resource that’s every bit as important as money, but that many dealers aren’t utilizing completely. However, this blog post series is focused on monetary capital, so we’ll come back to the concept of “frozen human capital” later.
Where Most Dealerships Have Frozen Capital
In the average dealership, the majority of frozen capital is locked up in excess inventory. While inventory levels should be based on the rules of supply and demand, with dealers holding just enough inventory (supply) to satisfy the immediate demands of customers. However, many dealers have excess of inventory, which becomes frozen capital.
For example: If you have $1,000,000 in parts inventory, and you’re only able to sell 50% of those parts, than the other 50% of your inventory becomes money that you’re essentially “sitting on,” only it’s stacked neat and tidy on shelves in the parts department. An investment that sits and waits is money that could be doing something else for your business, and therefore a very important concern.
How Does Capital Become Frozen?
The easy answer is that frozen capital is caused by bad management, but the specifics are a little more detailed. Some of the more common issues we find are:
- Lack of expertise in capital management on behalf of dealer principal, general manager, office staff, etc.
- Ineffective or unwritten policies and procedures that don’t maximize capital
- Untrained management isn’t aware of capital concerns
- Failure to monitor inventories at all management levels
- Inadequate accounting procedures
- Misunderstanding of responsibility and/or failure to hold managers accountable
Obviously, you can’t fix a frozen capital problem you can’t see, so recognizing frozen capital is key. Yet many dealers struggle to spot it. In our next blog post on this topic, we’ll teach you how to recognize the symptoms of frozen capital.