How dealers can plan for the future effectively

Liam Quegan: In recent times there have been countless articles written about the state of the market and what the future could hold in the world of automotive. Some are positive about the economic outlook, some not so much.

I wish we had a crystal ball to see into the future but unfortunately, we genuinely can’t predict what the next six months could bring.

So instead I’d like to focus on what dealers can do to ensure that their businesses are safe and secure for the remainder of 2020, and indeed 2021.

As we all know, the automotive industry has experienced somewhat of a ‘mini-boom’ since lockdown was lifted. Amongst the doom and gloom of late March and early April, few could have predicted the extent to which consumer demand and prices would bounce back once restrictions were lifted.

I think it’s important to enjoy these moments whilst we can, but as we all know, the market ebbs and flows and it’s important that dealers have one eye on the future and are prepared for what might come down the line.

The market is strong because consumer demand is high with stock in short supply. It’s hard to pinpoint the effect that pent-up demand from three months of reduced trading has had, but nevertheless everything combined has resulted in a strong return.

However, we don’t know what government support will be available in the future and rising unemployment remains a distinct possibility as the furlough scheme ends. This would dent consumer confidence and impact our industry.

At first, this seems like a scary prospect, but it doesn’t have to be if dealers plan for the future and take the necessary steps now.

So, what can dealers do to ensure the long-term security of their business?

In my opinion, it boils down to two things: diversify your funding sources and keep on top of your costs.

Using a variety of funding sources when buying stock is healthy because it keeps your business flexible without the risk of putting all your eggs in one basket.

We recently surveyed dealers across the UK to find out their funding since dealerships started to re-open on June 1st, and the results revealed that dealers are heeding this advice.
Dealers already had a variety of stock funding sources at their disposal prior to the pandemic, and since then, the government has provided even more ways in the form of the Bounce Back Loan Scheme and Coronavirus Business Interruption Loan Scheme. One in ten dealers has used such a scheme which is encouraging to see as there are no fees for the first year.

Captive and non-captive finance – such as NextGear Capital – remain popular with nearly a third of respondents saying they have used one or both. Funding stock this way not only allows dealers to source stock from multiple sources – which has become more common post-lockdown – but it also means a dealer’s cash isn’t tied up in stock sat on the forecourt, which may or may not sell quickly. In times like these where cash is tight and the market is volatile, freeing up cash is vital.

What stood out as a surprise to me was that nearly one-quarter of dealers said they had used an overdraft facility to fund stock since June this year, representing a big increase from 9% in 2018 when we had asked the same question. Although overdrafts provide money fast, I would always be cautious about them because they are inevitably a short-term solution. Repayments can be expensive so a dealer’s cash reserves can become an issue down the line when times are tougher.

Also surprising is that 78% are using their own cash, up from 47% in 2018. At a glance it makes sense – the money is readily available and there’s no cost attached – but cash flow is vital, so caution is needed to ensure dealers don’t over-stretch and bite off more than they can chew.

Keep on top of your costs and cash flow

And that brings me on to my second point: keep on top of your costs and cash flow.

When the market is as strong as It has been, it’s tempting to want to capitalise and grow your business. For many, this is the right thing to do and can prove to be a successful endeavor providing it’s done in the right way.

Make sure you’re not funding your growth in a way that could leave you flat-footed if the market turns. Always keep your costs at the front of your mind and ensure you have those cash reserves just in case. When buying stock, make use of the funding options available to you so all your money isn’t tied up. Agility and flexibility are key in times of uncertainty.

I’d recommend building your cash reserves just in case things do become more difficult in the future. When the outlook becomes clearer you may not need it as much then that money can be re-invested into your business, but whilst the market is volatile, it always helps to have that peace of mind.

Build a secure future with solid foundations

And if you don’t have your mind on growth at this time, that’s also fine. Sometimes it’s just as important to make sure your business is secure for the future with solid foundations as it is to expand. Again, make use of funding sources to free up cash flow and ensure you have the spare cash in case it’s needed.

Whichever way you choose to fund the vehicles on your forecourt, we’re always here to help you and offer advice. We appreciate that you won’t always use funding platforms like NextGear Capital, but we’re part of a large organisation with a view of the whole market and we are keen to help dealers through the good and the bad times.

Despite all the data at our disposal we still cannot predict what might happen in the coming months, so in the meantime, I encourage you to listen to the advice that’s out there, exercise caution, but ultimately be confident in your abilities and that the market will come out of this in a strong way. Speedbumps in the economy are inevitable, but the UK automotive market has proven time and time again that it can adapt and emerge stronger and wiser than it was before.