Chapter 3: Benchmarking Inventory and Asset Turns
Inventory and asset turns (turnover) are critical measures that every dealership needs to monitor. Inventory turns are calculated by dividing cost of sales by inventory. This ratio shows the number of times inventory is bought and sold during the year, and is shown on the dealership’s balance sheet.
|2012||2013||2014||2015||2016||5 Yr Avg|
Inventory Turns. The industry benchmark for inventory turns is 2.5-3.0. The 5-year average was 2.76 turns, within the industry’s benchmark goal.
In looking at the industry’s performance between 2012-16, it was within range at the start of the period at 2.91 turns in the 2012 study. Inventory turns then fell below the benchmark as sales declined in 2013 and 2014, at 2.15 and 2.40 turns, respectively. It should be noted that when inventories were quite high (81.3% of total assets) is when inventory turns fell to their lowest level (2.15 turns), which, of course, is never a healthy combination. (See "OPE Inventory & Asset Turns — 2012-16".)
The following 2 years, inventories as a percentage of total assets fell to their lowest levels of the 5-year period studied — 74.1% in 2014 and 75.6% in 2015 — and turns improved, reaching 2.4 and 3.02, respectively. This indicates dealers carried lower inventories and began to turn it more effectively.
As sales revenues rose rapidly as indicated in the 2016 study to $4.3 million on average, inventories also grew to their highest level (81.8% of total assets) during the 5-year period examined. The higher inventories were justified as the average turns easily exceeded the industry benchmark, rising to 3.34 turns.
Asset Turns. Asset turns are calculated by dividing sales by total assets. This ratio is a measure of efficient use of assets. However, as the UEDA study indicates, a high rate of turnover is not necessarily the key to profits as a high turnover may be an indicator of inadequate capital in relation to sales. Also, high use of rental property by a dealer often results in a high rate of turnover.
For the period, total asset turnover ranged from 2.26 turns in 2013 to 3.2 turns in 2016. During the last 5 years, the industry average 2.73 total asset turns.
Keep this third set of numbers handy — and share with your team — by downloading Measuring Up Chapter Three: Benchmarking Inventory and Asset Turns
Continue to the next page for Chapter 4: Tracking Total Profit & Net Income
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