I’ve spent my entire career in the car business, working in every franchise and holding just about every role within a dealership. One of the biggest momentum-killers in this industry is a lack of working capital. Without sufficient liquidity, even the most well-run dealerships can struggle to maintain inventory, cover operating expenses, and capitalize on growth opportunities.
Strategic advantage of manufacturer support: why cap loans matter
Fortunately, some manufacturers recognize this challenge and support their dealers with capital loans (cap loans) and other sales-boosting initiatives. This approach makes sense for several reasons. Dealers must go through a rigorous approval and vetting process before being awarded a franchise, demonstrating their financial and operational capability. By offering cap loans, manufacturers help ensure their dealers have the resources needed to thrive, which benefits everyone involved. The manufacturer-owned lender collects interest, the manufacturer sells more cars, and the dealership remains financially stable and positioned for growth.
However, not all franchises offer cap loans or other forms of dealer financial support, which I view as a short-sighted approach. The relationship between a franchisor and a franchisee is a unique partnership—when one side struggles, the other is affected as well. If a manufacturer fails to take a supportive stance, they ultimately do a disservice to both their dealers and themselves. A financially constrained dealer can’t invest in inventory, marketing, or customer experience, which leads to lower sales, weaker brand representation, and lost market share.
Supporting dealerships with well-structured financial programs isn’t just an act of goodwill—it’s a strategic investment in the long-term success of the entire dealer network.
Dealership working capital and its many moving parts
Whether a dealer is supported by ample cap loan lending and sales initiatives or not, the fact remains that working capital plays a crucial role in the success of the store. The required working capital for a franchise car dealership varies depending on several factors, including the manufacturer’s requirements and the dealership’s projected sales volume. However, there are some general guidelines and methods used to determine the working capital requirements.
Manufacturer-Specific Requirements
Different manufacturers have their own working capital guidelines for dealerships:
- Planning Volume Method: Many manufacturers base their working capital requirements on the dealership’s planning volume (PV) or projected annual vehicle sales. For example:
- Some use a formula of $1,000 to $1,500 per new vehicle projected to be sold annually.
- If a dealership is projected to sell 2,000 vehicles per year, the working capital requirement would be $2,000,000 to $3,000,000.
- Standardized Approach: Some manufacturers provide a standard working capital requirement at the beginning of the application process, based on planning volume or historical market share information.
- Forecast-Based Approach: Other manufacturers determine the working capital requirement based on the new owner’s forward forecast, typically provided mid-way through the application process.
General Guidelines
While specific requirements vary, there are some general guidelines for working capital in car dealerships:
- Minimum Duration: Most franchises require setting aside at least 6 months of working capital to handle debts and monthly obligations.
- Inventory and Parts: Typically, an OEM will require dealers to carry net working capital investment equal to two months’ parts inventory plus the value of two months’ new and used vehicle sales.
- Percentage of Sales: Working capital requirements can also be expressed as a percentage of sales, which can vary based on the dealership’s size and performance.
General Factors Affecting Dealership Working Capital Requirements
The following factors focus on prospective dealers trying to determine what’s needed:
- Dealership Size: Larger dealerships generally require more working capital.
- Brand and Vehicle Type: Luxury or new car dealerships may have higher working capital requirements compared to used car dealerships3.
- Location: The dealership’s location can influence working capital needs due to variations in operating costs and market conditions.
- Manufacturer Policies: Each automotive manufacturer has its own capital policies, which include working capital requirements.
Dealership Operational Factors Influencing Working Capital
Managing working capital effectively is critical for a franchise dealership, which operates across multiple departments of sales, service, and parts. Each department has unique financial needs that impact the dealership’s overall liquidity. Below are the key factors that influence a dealership’s working capital requirements and how they should be managed.
1. Fixed and Variable Costs
A dealership incurs both fixed and variable costs, each requiring careful management to ensure financial stability:
- Fixed Costs: These expenses remain constant regardless of sales volume and include rent, utilities, insurance, depreciation and amortization, loan payments and more. These obligations must be met even during slow months, so maintaining sufficient working capital is essential.
- Semi-Fixed Costs: These are expenses that remain relatively stable over time but can fluctuate based on business activity. These costs fall between fixed costs (which remain constant regardless of sales volume) and variable costs (which change directly with sales or production levels). Semi-fixed costs can increase or decrease depending on dealership performance, staffing levels, or market conditions, making them a crucial factor in financial planning.
- Variable Costs: These fluctuate based on business activity, such as sales commissions, floorplan interest, delivery expense and advertising. Since these costs rise and fall with demand, it is crucial to forecast them accurately to maintain the right level of working capital.
A CFO must analyze historical financial data to anticipate how these costs shift and adjust working capital accordingly.
2. Seasonal Sales Fluctuations
Like many businesses, franchise car dealerships experience seasonal trends that impact cash flow. Key periods include:
- Spring and summer: Higher demand for vehicles, leading to increased sales and service revenue.
- Year-end sales events: Incentives and promotions boost sales but may also require larger inventory investments and higher advertising spend.
- Slower months (ie: post-holiday or winter slowdown): Lower sales can strain cash reserves, making it necessary to have enough working capital to cover fixed expenses.
A dealership’s CFO should forecast these seasonal variations and adjust cash reserves accordingly to handle both peak and slow periods without financial strain.
3. Length of the Sales Cycle
The time between selling a vehicle and receiving full payment (including financing, manufacturer incentives, and rebates) significantly impacts cash flow.
- New car sales: Though banks and captive lenders finance most vehicle purchases, delayed payments from lenders create a gap in working capital. Personnel plays a huge role in managing and collecting contracts in transit and vehicle receivables.
- Used car sales: If vehicles are bought outright from customers, cash is tied up in inventory until resale. This is unless the dealership floors used cars, which is not ideal. Flooring used cars is costly and the terms are not great.
- Service and parts revenue: Customers may pay immediately, but dealerships extending credit to fleet accounts, extended warranty companies, insurance companies and of course factory warranty reimbursement may experience delays in receiving funds. Again, personnel plays a huge role in keeping things moving and collecting receivables.
A dealership CFO analyzes the sales cycle across all departments and works to ensure sufficient working capital is available to cover expenses while waiting for payments.
4. Inventory Management: Vehicles, Parts, and Service Supplies
Inventory is a major component of a dealership’s working capital, and improper management can severely impact cash flow.
- New and used vehicle inventory:
- Overstocking ties up large amounts of capital and leads to increased floorplan financing costs.
- Understocking can result in lost sales opportunities and customer dissatisfaction.
- Parts department:
- Maintaining the right balance of fast-moving parts and specialty orders ensures profitability without excessive capital investment.
- Service department supplies:
- Items like fluids, tools, and repair materials must be readily available without creating unnecessary storage costs.
Implementing real-time inventory tracking and turnover analysis helps a dealership optimize inventory levels and prevent cash flow issues.
5. Manufacturer and Vendor Payment Terms
The terms negotiated with manufacturers and vendors directly affects a dealership’s liquidity:
- Floorplan financing for new vehicles: Most dealerships rely on floorplan financing to purchase inventory, but interest rates and repayment schedules can strain working capital.
- Vendors: Suppliers vary in their payment requirements—some demand upfront payments, while others extend net-30. Conducting regular vendor audits and establishing a preferred vendor list helps strengthen relationships and can often lead to more favorable pricing and payment terms. By consistently reviewing supplier performance, negotiating terms, and consolidating purchases with trusted vendors, dealerships can improve cash flow and build strategic partnerships that support long-term financial stability.
- Manufacturer incentives and rebates: Many manufacturers offer incentives, but reimbursement delays can create short-term cash gaps. Here again, personnel that correctly manages the myriad incentives and programs is critical to getting paid on time.
6. Marketing and Advertising Expenses
Car dealerships depend heavily on marketing and advertising to generate leads and attract customers. These expenses include:
- Digital marketing campaigns (Google and Meta Ads, social media, SEO strategies)
- Traditional media (TV, radio, newspaper ads, billboards)
- Seasonal promotions and event marketing
Since advertising budgets fluctuate based on sales goals and seasonal trends, working capital must be allocated carefully to avoid overspending while ensuring a steady flow of leads.
7. Employee Wages, Commissions, and Benefits
A dealership’s workforce is one of its most significant expenses because it’s the people who sell and service the cars.
- Sales commissions: These costs vary based on vehicle sales volume and compensation structure.
- Technician salaries: Skilled service technicians are paid hourly or commission/flat-rate, and demand-based fluctuations, such as seasonal service spikes, may require overtime pay.
- Administrative and support staff wages: Lot gentlemen and ladies, accounting, and customer service require stable pay regardless of sales fluctuations.
- Benefits and payroll taxes: Health insurance, retirement contributions, and other benefits must be accounted for in working capital planning.
A dealership CFO aligns payroll expenses with revenue trends to ensure sustainable financial management.
Final Thoughts: A CFO’s Approach to Working Capital Optimization
A successful franchise car dealership balances all these factors to maintain a healthy working capital position. The CFO must continuously monitor cash flow, optimize purchasing, negotiate supplier terms, forecast revenue and expenses and ensure the bank accounts are balanced daily to prevent liquidity issues.
- Proactive financial planning ensures that the dealership can handle seasonal changes, cover expenses during slow months, and seize growth opportunities when they arise.
- Strategic inventory management helps prevent capital from being tied up in excess vehicles or parts while ensuring customers’ needs are met.
- Clear financial policies enable better credit terms, improved supplier relationships, and reduced financial risk.
By managing these elements effectively, a dealership CFO can maintain the stores’ strong financial health, support sustainable growth, and avoid unnecessary financial strain.
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