Car dealerships across Australia are certainly feeling the pressure of COVID-19 restrictions, at a time when profitability was already a key point of focus. Deloitte data showed 36% of dealers made no profit in 2019, while another 20% just managed to break even1. That leaves very little in the way of a safety net during a crisis.
Though this may be disheartening for car dealership owners and managers, there is a silver lining. Recent sales data suggests demand is starting to recover after the initial shock in March and April.
“Through May, we saw finance applications increasing week on week from our dealers. With the deadline for the expanded asset-write-off scheme looming, June looks like it will also be a strong month for commercial vehicle sales,” observes Colin Euers, Head of Dealer Retail with Macquarie Bank.
However, the second half of the year is still uncertain. Euers says demand could be quite flat, and some OEMs could have stock issues given the impact on global supply chains.
Unsurprisingly, a recent survey found that cash flow is the number one concern for dealerships, with more than 80% believing it could take more than six months for their business to recover2.
As a result, it may be beneficial for you to have a clear view of what drives your dealership’s financial performance and have a realistic cash flow forecast – especially if you need to make significant decisions about your business’ future. And remember, Macquarie’s team is here to help you work through these questions.
How long will your current cash position last?
It might be useful to think about your current cash position, forecast inflow (new and used car sales, service and parts income, OEM bonuses and finance and insurance income), and outflow (fixed and variable expenses) for the next two, four and six months.
Michael Harris, Macquarie Bank Dealer Finance Regional Manager for WA and SA, says you could use those forecasts to look at your monthly cash burn rate and runway – to work out where the potential holes could be.
If your business is focused on preserving cash, the first 30 to 60 days may be critical to successfully resuming ‘business as usual’ activities for franchised car dealerships.
For dealers facing significant impacts to their cash position, wage assistance through the Federal Government’s JobKeeper program could provide valuable support.
Most Australian franchised car dealerships have remained open for business and it appears that the economy is slowly beginning to re-open. This may present a new challenge for dealers: considering how to prepare for a sustained return in new and used sales demand, and checking that they have enough cash flow to support the ramp-up.
What levers could you pull and when?
Here are some other points for your consideration as you prioritise efforts to contain costs and optimise revenue.
Timing is important
Over-extending credit to purchase inventory to time the bottom of the market is a key business risk in a volatile situation. Think carefully before making inventory purchases and consider whether they are proportionate to sales.
Short term deferrals of rent and other costs are likely to see many of these expenses mature at the same time. If you have also used additional credit to purchase inventory, this could result in a borrowing cycle that provides little wiggle room in the future.
June is typically the strongest month for car sales. Lisa Stacey, Head of Dealer Wholesale with Macquarie Bank, suggests that dealers could use this time to build cash reserves.
“Continue activities that have been working over the past 10 weeks, and optimise for future uncertainty by reducing operational expenses where possible,” she suggests. One example could be adjusting the work schedules of sales teams around peak sales hours or days.