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Why Holding Cost Is The Most Important Factor In Used Car Profits

Why Holding Cost is the Most Important Factor in Used Car Profits

For most dealerships, used vehicles remain the true profit center. Yet, a lot of times we mistake generating gross for generating profit. While generating gross most certainly is the star, how that money flows through to the bottom line is one of the most fundamentally misunderstood mechanisms in the business. And it all starts with holding cost.

Holding cost is how much per unit it takes to hold and maintain your inventory. Generally, you would take your fixed expenses plus your gross floor plan expense and add them together. Some dealers like to add in personal (lot porters, etc), but for the sake of this discussion, we will just talk about floorplan and fixed expenses.

Once we have your overall holding cost, we need to get a per unit basis. Most would just take average inventory levels and divide the two. This, however, is wrong. As inventory turns increase an interesting effect occurs: your per vehicle holding cost goes down, thereby increasing your profit per vehicle.

Let’s put some numbers to it.

Let’s say your average fixed costs plus gross floor plan costs are around $300,000 and you keep an average of 500 units in stock. Your holding cost per unit would be $600. With a 30-day month, you’re paying $20 per day in holding costs on each vehicle. Now, here’s where most dealers get tripped up. Inventory turns lower that holding cost per unit. The more units you have passing through your inventory, the lower your per unit holding cost. The lower the cost, the more profit flows through to the bottom line.

Total Holding Cost: $300,000

Average Inventory: 500

Holding Cost Per Unit: $600

Now, let’s say you start turning your vehicles faster. Your sales volume increases, but your average inventory stays the same. Since you’re turning faster, the overall inventory that is attributed to your holding costs goes up, therefore decreasing your per unit holding cost.

Total Holding Cost: $300,000

Average Inventory: 500

Additional Inventory from Turning: 100

Holding Cost Per Unit: $500

So just by turning your vehicles faster, you decreased your holding cost per unit by $100 per month. That means if you sell 200 used units per month, that’s an additional $20,000 in PROFIT per month!

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