Cut Your Wholesale Losses

Is your wholesale loss devouring any gross profit contribution your used-vehicle retail sales are generating?

In my travels, reviewing profit and loss statements for various dealerships, it is apparent that many times wholesale loss is the difference between really profitable used vehicle operations and those that lose substantial amounts of money.

The amazing thing that I see is the creativeness of some dealers to eliminate this loss, using what's called a “bruise account” or “slush fund.”

They accrue dollars against each unit that comes into inventory to offset the loss and apply those dollars on the financial statement as a credit to the wholesale line, thus understating the real loss by substantial amounts.

It makes them feel better. But it doesn't fix the problem. If we can't measure something, we most likely won't be able to improve it. Understating on financial statements only masks the problem.

The first step to reducing the wholesale loss in any used-vehicle department is to understand what it should be and exactly how much it is.

Make sure that whatever you list on the wholesale line of your manufacturer's monthly statement truly reflects what really took place as a result of the inventory you wholesaled.

As for how much it should be, domestic dealers typically are at $17 per used vehicle wholesale (PUVW), imports are at $78 PUVW and high-line dealers are at $79 PUVW.

If you insist on using a bruise account, slush fund or accrual account for offsetting the loss, take that money to the “Inventory Adjustment” line on your statement or back to the “Gross Profit” line.

The bottom line stays the same and you will have properly stated your wholesale loss. If your loss is significant, I hope it will motivate you to fix the core problem.

That repair job starts with a good appraisal process. Two heads are better than one at this point. So I encourage clients to have more than one manager involved in the appraisal process.

A good appraisal should be performed the same way each time. It starts with a properly filled out appraisal form that the sales associate completed with the customer, preferably after they conducted a walk-around of the trade in.

Then the managers do a walk-around. Begin at the front. Move clockwise, inspecting for paint, body and glass damage and tire wear. Check under the hood, the trunk/storage area and interior. Note on the appraisal slip any visible damage.

Next, do a road test at road speeds to determine drivability and handling. This cannot be assessed in a dealer's lot.

I often hear managers say they only test drive potential trade-ins that are out of warranty, because they are too busy to drive everything being appraised. They assume because a vehicle is in warranty, they won't worry about repair amounts.

That is a lot like playing Russian roulette. There could well be problems not warranty related.

Next take time to review a stack of appraisal slips that have been completed by each manager. The key here is whether the appraisal slip reflects consideration for all elements required to make the vehicle a saleable unit at your dealership.

You be the judge. After reviewing the slips and observing your managers as they perform appraisals, you should be able to determine if adequate time and consideration have been given to the process.

I find most managers fill out an appraisal slip with the year, make, model, VIN, mileage and some of the options. Then they set a price for the trade.

But what is missing is the itemization of money to make that vehicle ready for sale. Does it need new tires, body work, glass work or upholstery repair? Have high- or low-mileage adjustments been made?

To get actual cash value, the appraisal form should reflect estimated reconditioning expensed subtracted from the book value.

Measure and state your wholesale loss. Do a sound appraisal. You'll dramatically cut your wholesale losses.

Dennis Gregg is a used-car consultant for NCM Associates Inc. He is at 913-649-7830 and [email protected].