Where is opportunity cost of wholesaling reported on the dealer financial statement?
- The Weekly Spiff!
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By Marilou C. Vroman, CPA, CFE
If you are like many dealers, you look at the variable operations section of your manufacturer financial statement and review your PVRs (gross profit per vehicle retailed) and most will contemplate how that number can be increased next month. Moments later, you will scroll a bit further down and look at your wholesale gross profit. If you see your wholesale gross profit hovering around zero, which many of us have been conditioned to believe is “OK”, we accept the number, wish for more, and then refocus on retail. The reality is, wholesale gross has as much to do with retail, as the act of retailing itself.
Wholesale gross is typically budgeted at zero gross profit, and if you have an engaged used car manager, this will often be the case. The risk in looking at the monthly total, is not fully knowing the underlying transactions and the opportunity cost that got your dealership to zero gross, and what was the opportunity cost of getting there?
Wholesale losses are often deferrals of retail losses from earlier periods. To “make a deal,” sales managers can enhance the appearance of retail gross profit by inflating the ACV of a trade in. The overvalued trade then sits in inventory and ages because it has too much cost, and no one wants to take the loss until the dealership’s aging policy kicks in and forces the sale. Conversely, vehicles could be purchased with the sole intent of being wholesaled, perhaps at a small profit to offset these deferred losses. The opportunity cost arises when vehicles that could have been retailed are instead being wholesaled to bring the gross for the month closer to zero. We often see dealerships with high quality low mileage vehicles rapidly wholesaled at a small profit with little explanation. While there is a short-term gain, the dealership misses out on F&I, future parts and service, and repeat/referral business on wholesales.
Unfortunately, the opportunity cost of wholesaling is not reported on your financial statement. However, if you ask the right questions of your sales managers to increase accountability over the details of your wholesale activity, you might just find that opportunity cost reported as higher retail PVRs.