Last fall, I wrote an article titled “Here We Go Again”. It referred to the direction we were heading regarding used inventory across the industry. New production continued ramping up post- COVID, and we were all out there making deals and taking trades. Based on what I have seen in my travels across western Canada this spring, we aren’t just at the edge of the inventory cliff, some of us have already gone over it. The frightening difference this time is that the value of the equipment is much higher, and the late model used buyers have is getting smaller and smaller.
As dealers, we should never waste a crisis, meaning we need to take this opportunity to re-evaluate how we do business, who runs our business, and how we take advantage of tough times to “drought-proof ” our dealerships. None of these ideas are revolutionary, but they must be the guiding principles we use to operate our businesses. If we stick to them, we have a far better chance of remaining profitable during tough times, and we will come out the other end stronger. If we continue to focus on these principles when the times improve, we will be even more profitable. The problem is we tend to forget them when things start rolling again.
Cash is King
Businesses don’t go broke because they aren’t making money, they go broke because they run out of cash. We need to protect as much as possible. Most dealerships have multiple options for credit facilities, whether through a supplier or your financial partners. Rates and terms can vary greatly, and it is important to understand what you are signing up for when you do.
- What are the repayment terms?
- What are the interest rates, and are they fixed or floating?
- What security are they looking for to provide credit?
- How many separate facilities should you have, or how many can you manage?
As with any advice, take what makes sense for your business. Maybe you have always been a “pay cash and take the discount” person. If you can continue to do so during these times, then good for you! My questions to you would be “what value do you put on your cash?” and “do you consider opportunity cost when you pay cash?”
- Do I keep the cash discount when I pay cash, or do I pass it all through?
- Do I know what my “cost of capital” is, or how to value my cash?
- Do I have an expectation of how long before I get
my cash back?
There are times when it may make sense to take advantage of cash discounts, and times when it makes sense to use terms. Just make sure you know which is which. For instance, if you are ordering a product for a retail sale
with a cash discount available, you could take advantage of that discount to add margin to the deal or win the deal in a competitive situation. If you are ordering products for inventory that you don’t have presold, it may make sense to use terms as you may not know how long your cash will be tied up. This helps preserve cash to take advantage of opportunities that may come up, or if nothing else, helps pay the bills.
Do We Know Our AOR?
This is one of the most offensive questions you can ask a dealer. Many of us would get downright mad if someone suggested we didn’t know our area and our customers. I know I used to. When I stopped to think about it, I
wasn’t as confident as I thought. I am bold enough to suggest that smaller dealers know their AOR better than the largest of the large dealers know theirs. My reasoning is simple. Most smaller dealerships have been where they are for a long time, and they have a smaller area to get to know. There are fewer customers and fewer moving parts, so keeping on top of what is happening and where should be easier. Larger dealers that are growing are acquiring new areas that they are getting to know as they grow. They may have a system in place to do so, and they may be very good at it, but it still takes time.
Why is this important? Well, knowing your AOR is one of the foundations of being successful.
- How many customers?
- What is the machine population and product mix?
- How many acres?
- How many competitors are there?
- What are the main industries?
- What is the true market area potential?
Knowing this information allows you to build your business strategy effectively. It is the basis for your parts and whole goods inventory, and ultimately how you scale your business. How many technicians do I need? How many parts technicians do I need? How many salespeople do I need? How many service trucks, how big a building, etc.
When you don’t understand what your AOR can produce or support, you risk carrying more inventory than you should or you could be at risk of not participating in the business that is happening. Either scenario does not lend itself to long-term success or business viability.
Just Because We Can Doesn’t Mean We Should
It is next to impossible for a salesperson to say no to a deal. It is difficult for a sales manager or dealer principal to say no to a deal; it’s human nature. We don’t want to miss out on an opportunity. We get hypnotized by the thought of selling a new shiny whatever. However, there are times the best deal you make is the one you don’t do. If we have never sold 20 used combines in a year, why would we go out and sell 25 new ones and take trades on all of them? Just because we can keep selling new equipment in a hot market doesn’t mean we should keep selling. Unless you can sell without taking more and more used on trade, it may be time to pump the brakes. It is much easier to sell yourself into trouble than it is to sell your way out of it.
This goes back to why knowing your AOR is so important. Understanding how your business’s engine runs is also critical. Let’s focus on whole goods.
- Do you know the washout cycle for each product
you sell? - Do you know your R12 used turns?
- Do you know your inventory-to-sales ratio?
- Do you know your average days in inventory?
- Do you know how much aged inventory you have?
- Do you even monitor any of these KPIs?
Any of these KPIs, on their own, won’t necessarily tell the story of the health of your
whole goods department, but when used together, they will paint a clear picture of the health of your inventory.
This will allow you to clean up the units you carried into the year as well as generate enough
inventory to cover your average annual used sales. If you sell units without trades or your washout cycle is shortening, the number could be safely higher, but if you stick to this formula, you will lessen the chances of building your used inventory to a problem level.
EXAMPLE:
5-year average used combine sales: 40 Used inventory carried into the year: 5 Average combine washout: 4
How many new combines should you sell? THE ANSWER IS 9. Here is the math:
Average Used Sales – Inventory Carried In = 40 – 5 = 8.75 = 9 new combine sales
Average Washout 4
Facing the Storm Head On
Those who have been in the business for a long time know this isn’t the first time we have faced
the headwinds of used inventory levels. We seem to do it to ourselves every few years, and it usually
takes longer to get there than it did this time.
If we could jump in our DeLorean and go back in time to tell ourselves when to quit adding
used inventory, I am sure we would. Unfortunately, we can’t. We need to learn from the past and
be prepared to make strategic decisions BEFORE we get in trouble. These decisions are difficult to
make and certainly won’t be popular with your mainline, but they are necessary for your business
to come through the trough.
- Curb new sales to manage used levels before you have a problem.
- When making deals, remember you are buying used inventory to sell, not just taking trades to facilitate a sale.
- It is ok to say no to a deal or trade if it doesn’t make sense.
- Protect your cash as much as possible.
- Push back on suppliers demanding you carry more inventory than you are comfortable with.
- Consider trimming product offerings that tie up cash or don’t provide a return.
- Sell new from an empty shelf or off another lot whenever possible.
New equipment sales are a cornerstone of your business. New sales help build your machine
population over the long term, which in turn creates a healthy aftermarket business. These sales also
provide opportunities to buy used equipment to resell and drive revenue. New sales are a tool in
your toolbox to help drive your business, but they are not the only key to success. When managed
properly, they will drive growth. When mismanaged, they can dig a hole you may not get out of.
If you have some foresight and manage your business with good data, you will be successful.
When you reach a decision that is difficult to make, err on the side of caution. There are times to
take risks, and only you will know when that time is for your business.
Article Written By: Arthur Ward, Dealer Institute
ARTHUR WARD is a trainer with NAEDA’s Dealer Institute. Prior to joining DI as a wholegoods and sales specialist and trainer, Arthur held leadership roles within Pattison Agriculture and its legacy dealerships in Canada, and he is currently the Chief Integration Officer for Aberhart Group. He looks forward to helping dealers succeed by improving whole goods and sales operations.
