Frozen capital could be costing your dealership tens of thousands of dollars. While most dealerships have frozen capital, many dealers fail to identify the sources of their frozen capital. Here we have identified the top places where your capital and become frozen and the signs of frozen capital.
While a lot of things need to happen for a department to become profitable, excess inventory is often a factor when profits struggle to break even. We often find frozen capital in unprofitable departments.
These account include things such as vehicle receivables, parts/service receivables, and contracts in transit. As a rule of thumb, contracts in transit should be funded within 3 days and receivables, no more than 30 days. If a receivable is over 30 days old, the chances of you getting those funds are significantly reduced. This is a major form frozen capital.
Aged parts and vehicle inventories
If your inventory turnover rate is low, there is indication that there is an efficiency issue. It doesn’t take a genius to tell you that when an item is too old, it becomes very difficult to sell.
Much of the average dealership’s frozen capital is found in aged parts and vehicles. Chances are you had a bad sales period, and much of the stock you purchased remained unsold. If your used car manager or parts manager loaded up on inventory six months ago, but then didn’t sell as much as expected, they could very well be dealing with that mistake today. Parts might be trying to slowly sell excess inventory down, tying up shelf space (or parts inventory dollars) that could be used for faster turning parts. Used cars could be coping with the residual impacts of blowing out aged inventory, from over-evaluating trades to move distressed units, to under-valuing trades to try and compensate for wholesale loss.
Bounced finance contracts
Bounced finance contracts include things such as checks, loans, and other vehicle receivables. If you are waiting to be paid, there is a lot of money held up in their contracts that did not go through. The accounting department of your dealership needs to keep up with these accounts.
Now that we’ve identified common areas where dealers have frozen capital, we’ll talk about resolving frozen capital problems in our next post on the topic.