How to do inventory calculations for auto dealerships
If you own an auto dealership, both you and your sale managers inevitably spend a considerable amount of time taking into account your monthly, quarterly, and annual inventory turnover. This applies to your inventory of new as well as used vehicles. Managing your inventory is important because it can show you whether the efforts of your sales staff are effective as well as whether costs are being controlled.
Comparing your inventory turnover figures to your bottom line, the question then becomes “Does this add up?” But a better question would be “How should I determine my inventory turnover ratio?” The inventory turnover ratio is a better measure of how well your dealership is generating sales for your inventory.
Determining your inventory turnover ratio involves some simple mathematics. To calculate inventory turnover ratio, you need to know the cost of goods sold and the average inventory. To get the cost of goods sold, simply add up the total value of the inventory that you’ve sold in a given period – a month, a quarter, a year. To get your average inventory, add up the number of cars in your inventory at the start of the period in question and the number of cars in the inventory at the end of that period. Then, simply divide that total by 2.
Managing the full lot
In addition to calculating the inventory turnover ratio for a given period, some dealers also like to consider their “Days Sale of Inventory” or DSI which is a comparison of days to sales. In other words, DSI measures the number of days it takes for your inventory to turn into sales.
To calculate DSI, you simply divide the average inventory by the cost of goods sold and then multiply that figure by 365. A lower DSI means that fewer days are needed to turn your inventory into cash.
The inventory turnover ratio and the days of sale inventory are important for car dealers with respect to inventory management and cash flow because they are an indication of just how efficient you and your sale managers are at successfully managing your inventory. They can provide answers to the questions of whether your stocking as many cars as you should or, conversely, are overstocking.
With professional help
GYL provides a full range of financial services for auto dealerships. Our specialists assist you in realizing your dealership’s full potential and minimizing your tax liabilities while maximizing your cash flow.
Our full services for auto dealers include, but are not limited to:
- Audit and accounting
- Compliance auditing
- Inventory controls
- Dealership valuation studies
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- Tax planning and compliance
Our automotive dealership accounting specialists have in-depth knowledge of the industry’s unique taxation and accounting requirements. Let us help you successfully navigate this continually evolving industry.
We offer a full range of services for automobile dealerships, schedule your free consultation today.