How long a dealership's cash is tied up
Working out a dealership's cash conversion cycle from its own books, and the levers in vehicle stock, parts, debtors and suppliers that shorten it.
By Achekam · · 5 min read · For Automotive businesses in South Africa, Nigeria, Kenya
A dealership can be selling well, showing a healthy gross margin on every unit, and still be short of cash every month end. The reason is usually not profit. It is time: the gap between the day money leaves the business to buy a vehicle or a box of parts, and the day the money comes back from a customer or a finance house.
That gap has a name, and it can be measured from the books a dealer already keeps. Once it is measured, it can be managed. This article explains how to work it out, where the days hide in a dealership, and which levers shorten it without creating new problems.
Inventory days plus receivable days minus payable days
ACCA describes the cash operating cycle, also called the working capital cycle or the cash conversion cycle, as inventory days plus receivables days minus payables days. It is the number of days between paying suppliers and receiving cash from sales. ACCA's article on working capital management sets out the calculation and the thinking behind it.
In dealership terms:
- Inventory days: how long, on average, a vehicle or a part sits in stock before it is sold.
- Receivable days: how long, after a sale, the dealership waits to be paid.
- Payable days: how long the dealership takes to pay its own suppliers.
Add the first two, subtract the third, and you have the number of days your own cash is funding the business. The longer it is, the more working capital the dealership needs just to stand still.
Where the days come from in the books
Each component is a simple ratio, using figures from the management accounts:
- Inventory days: average inventory divided by cost of sales for the period, multiplied by the number of days in the period.
- Receivable days: trade receivables divided by sales on credit for the period, multiplied by the days in the period.
- Payable days: trade payables divided by purchases (or cost of sales, if purchases are not separated) for the period, multiplied by the days in the period.
Achekam's management accounts show an income statement for a chosen period beside the period before, and a balance sheet at the period end, both added up from the business's own journals and exportable as PDF or CSV. The balance sheet gives you inventory, receivables and payables; the income statement gives you sales and cost of sales. Export both to a spreadsheet and the ratios are quick to work out. Note that the year-to-date preset starts on 1 January, not on the dealership's own year start, so choose the period deliberately.
Calculate it monthly on the same basis and watch the trend rather than any single month.
Vehicles and parts sitting in stock
For most dealers, inventory days dominate. A used vehicle bought on trade-in starts costing money the day it arrives: finance cost if it is on a stock facility, reconditioning, insurance, and the opportunity cost of the cash. Parts carry their own version: slow-moving lines bought in bulk that sit on a shelf for months.
ACCA lists the advantages of holding inventory as meeting customer demand, taking bulk discounts and reducing total re-ordering cost, and the disadvantages as storage costs, the cost of capital tied up, and deterioration, obsolescence and theft. A dealership feels all of these. A model year change makes yesterday's stock older overnight; a part for a discontinued model may never sell.
Shortening inventory days usually means a clear ageing rule for used vehicles, with a price review or a wholesale decision at fixed points, and a parts buying policy that favours supplier delivery over holding stock for slow lines.
Customers and finance houses paying later
Receivable days in a dealership come from a few distinct sources: fleet and trade customers on account, insurers paying for repair work, and finance houses settling vehicle deals. Each has its own rhythm, so look at them separately rather than as one figure.
Achekam ages receivables into 0-30, 31-60, 61-90, 91-120 and over 120 days, with overdue totals. Read that report by customer type. A fleet customer drifting from the first column into the second is a conversation for this week. A finance house settlement that has not arrived after the deal was delivered is a paperwork problem to chase now, not at month end.
Paying suppliers later, and the risk in it
The tempting lever is the third one: pay suppliers more slowly, and the cycle shortens on paper. ACCA cautions that delaying payments to suppliers can backfire, because a powerful supplier may then demand cash on delivery. For a dealer, the parts distributor or the manufacturer is often exactly that kind of supplier. Lose your account terms and the cycle gets worse, not better.
The better approach is to pay on the agreed date, not before and not after. In Achekam a business records supplier bills line by line with VAT, a bill without a purchase order waits for approval before it posts, and a bill can be paid in full or in parts from a chosen bank account. Recording bills as they arrive, with their due dates, lets you plan payments to the date rather than paying whatever is on the desk.
The trade-off behind the number
ACCA explains that working capital management has two objectives, liquidity and profitability, and that they involve a trade-off, because funds tied up in working capital earn little or no return. A dealership with almost no stock has a short cycle and few sales. A dealership with a lot loses money to finance cost and ageing.
The goal is not the shortest possible cycle. It is a cycle you understand, measured the same way every month, with an explanation whenever it moves. For used stock specifically, see used vehicles in stock; for the broader concept, read working capital explained; and when the bank asks how you will fund the gap, the cash forecast a bank wants is the next step.
A dealer who knows the number can answer the bank manager's first question before it is asked.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
