We’ve often heard the phrases, “If you can’t track it, you can’t learn from it,” and “Knowledge is power.” These couldn’t be truer than they are today in the buy here pay here industry. It’s fairly easy to open a buy here pay here dealership (in most states). You simply get a lot, get a license, buy some cars and sell some cars. The trick is keeping it open.
The key to keeping it open is managing cash flow. Often, dealers open lots, sell plenty of vehicles and then, after months of everything seemingly going well, they can’t understand why they’re exceeding their cash flow projections. They tell us, “My delinquency isn’t bad and I’m selling cars, so why am I running low on cash?” There may be many reasons for cash flow shortages such as:
Selling too many cars too fast
Not adhering to a cash-in-deal policy
Reconditioning costs are higher than expected
Operating expenses skyrocket
Or any combination thereof
Most of these issues can be easily identified and monitored with the use of month-end reports. However, one issue that is more difficult to identify from viewing month-end reports that affects cash flow is how well the staff manages the collection of the accounts receivable. For that, you need to dig a little deeper.
Webster defines data as “factual information used as a basis for reasoning, discussion or calculation.” Data mining has been defined as “the nontrivial extraction of implicit, previously unknown and potentially useful information from data” involving sorting through large amounts of data and picking out relevant information.
Over the last 18 years, we have “mined” weekly data collected from BHPH dealers across the nation. Of the many key indicators that are prevalent in today’s business (charge-off rates, loss rates, default rates, recency rates, delinquency rates, etc.), one stands out above the rest. With over 900 weeks of data reviewed, we have determined that the single best indicator of how well collections are being managed at a buy here pay here lot is the weekly collection rate. This figure is the percentage of the projected payments actually collected, calculated on a weekly basis (not monthly). Large pay-offs, insurance payments and “roll-over” pay-offs were deducted from the car payments collected to ensure consistency.
Delinquency rates, by themselves, aren’t the best indicators of how efficiently the staff is collecting the dealer’s money. A high delinquency rate doesn’t always indicate poor collections. The dealership may be experiencing a high recency rate not reflected in the higher delinquency rate.
Likewise, a low delinquency rate does not always indicate good collections. Delinquency rates can be manipulated by managers that have little or no supervision by means of contract rewrites (used to age delinquent payments) or by charging off accounts too quickly (before truly working the customer).
The use of the weekly collection rate will help identify these issues. The rate can vary from week to week, but an average of 95 percent or better indicates the staff is managing the collections of the accounts receivable well. If charge-offs are high, you would see a drop in the collection rate. If accounts are being rewritten to “age” delinquent payments, you would see a drop in the collection rate. Conversely, if the staff is being diligent and working the customers properly, you should see an increase in the collection rate. If they are persistent with the extremely past due customers, you should see an increase in the collection rate.
Always remember, if you can't inspect it, you can't track it. If you can't track it, there is no accountability. No accountability also means no motivation, and no motivation means no reasons to change. Don’t expect what you can't inspect. Your data is like gold. Mine it often.
Vol 4, Issue 3
