How to Calculate Your Car Dealership Inventory Turnover Ratio

Bunch of new cars parked in dealer's parking area

Measuring the success of your auto dealership includes many metrics to track. The buying process isn’t linear any longer, as the digital age has transformed buyer behaviors, influencing changes in how you sell and market vehicles.  One of the most crucial numbers to calculate and use as a KPI (key performance indicator) is the automotive industry inventory turnover ratio.

This ratio offers insight into your effectiveness at moving existing inventory. Based on this analysis, you can make more data-driven decisions, resulting in greater dealership profitability.

Why is Car Dealership Inventory Turnover Important?

As with any organization, moving inventory has many implications. When it sits too long, costs rise while profitability wanes. Accelerating the inventory turnover for car dealerships yields many benefits, including:

  • Improvements in cash flow: The quicker you turn, the more capital you have for reinvestment and reducing unsold inventory carrying costs.
  • Reducing holding costs: Increasing your inventory turnover ratio helps you cut expenses related to financing, insurance, warehousing, and depreciation.
  • Minimizing depreciation risk: Extended lot times lead to inventory depreciation, lower market value, and wear and tear, which triggers price reductions.
  • Enriching customer satisfaction: With data-driven insights, you can align inventory with consumer preferences, decreasing turnover times and propelling sales and satisfaction.

Your turnover ratio reflects how efficient you are at managing your inventory. If the ratio becomes too high, you move further away from profitability. Cars stagnating on your lot tie up capital, so improving it is a high priority.

3 Steps for Calculating Your Car Dealership Inventory Turnover Ratio

Understanding how to compute inventory turnover requires three simple steps. You should calculate this metric consistently, at least monthly. Regular measurement enables you to maintain data accuracy and projections.

Step 1: Identify Your Cost of Goods Sold

The first step is to determine the cost of goods sold (COGS). This number is the total value of all your inventory sold over a defined period of time, and can be found using your financial statements.

This number is critical to watch, as it illustrates what your entire inventory is costing you across all expenses. In reviewing this number, you may find areas of cost to examine that are inefficient and wasteful.

Instead of COGS, you might use a Cost of Goods Sold calculation. Sometimes, this may calculate automatically based on your income statement. If not, you can use these formulas to find COGs or Cost of Sales.

COGS/Cost of Sales = Total Retail Sales – Front-End Retail Gross

COGS/Cost of Sales = Beginning Inventory Value + Value of Any Inventory Purchased During the Period – Ending Inventory Value

Step 2: Calculate Your Average Inventory Value

The next step in computing inventory turnover in the automotive industry is average inventory value. Your inventory levels will fluctuate based on seasonality, availability, and turn rates. It’s an essential metric that tells you how much stock you’ll need to sell to reach your sales goals. The higher it is, the better opportunity for greater margins.

Use this formula to calculate the average inventory value.

Average Inventory Value = (Sum of Inventory Values for Time Period / Time Period)  

Step 3: Divide The Two Metrics

With the COGs and average inventory value numbers ready, it’s time to calculate the automotive industry inventory turnover ratio

Take these inputs and divide them with this formula.

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory Value

What is a Good Inventory Turnover Ratio for the Automobile Industry?

Cars parked in parking area

There are many questions about what is a good inventory turnover for the automotive industry. It’s something you should look at as part of determining and optimizing profitability. When you emphasize it as a KPI of success, you’ll be able to perfect it. If you don’t measure it, you can’t improve it.

In looking at the average inventory turnover for the automotive industry, keep in mind that different markets have different rates of sale. For example, specialty, high-end vehicles have a longer sales cycle than regular, high-volume ones. Finding your ideal number will depend on this and other factors–sales staff, current demand, and pricing.

The gold standard is 12 turns, which translates to holding 30 days of inventory. If your inventory turn rate is lower than this benchmark, you should develop a strategy to drive more sales with innovative and fresh ideas.

Tips to Improve Your Inventory Turnover Ratio

Your primary objective is to increase sales and enhance the customer experience. Accomplishing this involves many tactics and best practices. If you’re seeking inspiration and creative approaches, these tips will serve you well in improving your car dealership inventory turnover ratio.

Deepen Your Knowledge of Your Customer Base

You’ll see greater turns when you prioritize understanding a target audience’s needs, expectations, behaviors, and preferences. Without this, there can be a mismatch in what you think they want versus reality.

Stay in the know by looking at third-party data about consumer behavior. Look at your internal data, too, including past sales and things like vehicle views on your website.

Offer Special Deals  

Drive more foot traffic to dealerships by creating and successfully promoting deals and discounts. Make sure these align with customer needs and your finances. They can include cash-back promotions, 0% financing, or no money down.

Incentivize Salespeople

Seller performance is a significant component in improving your turnover ratio. Keeping them motivated directly impacts this. Establish a rewards system that balances incentives with margins. Communicate it effectively so they know what to do to achieve the reward. Do this in concert with setting monthly, quarterly, and annual sales goals.

Modernize Online Shopping Experiences

Your website and digital footprint also impact how fast you sell inventory. As a result of the pandemic, car buying has adapted and moved online. This trend is still present, and most consumers want to begin the process online. Industry leaders foresee this as becoming the norm by 2030. As a result, the experience on your website should incorporate features such as booking appointments online, creating virtual showrooms, keeping inventory balances accurate, and starting the financing process.

Use Inventory Management Software

A robust, data-centric inventory management software platform is key to implementing these strategies. This software should help you move cars faster by:

  • Enabling precise targeting of potential buyers
  • Reducing advertising waste
  • Providing real-time inventory updates
  • Delivering data-driven insights

With these features, you have greater visibility into inventory ratios and turnover, which helps you boost sales efficiency and decrease holding costs. You can gain all this functionality with inventory management software from Lotlinx. Its key differentiator among market solutions is management and marketing at the VIN level.    

Improve Inventory Turnover with Lotlinx

Inventory turnover ratios for car dealerships can be a powerful metric for understanding many success factors. Measuring and monitoring will enable you to improve it. You can build a more practical and effective turn strategy with an analysis of your ratio and employing the tips above. Lotlinx will help you get there faster.
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