Already stretched car dealers face cash flow crunch time as experts warn failures could be looming

Time 1 year ago

Car dealers may be enjoying a bumper return to work in June but there are warnings that a forthcoming cash flow crunch time has gone unnoticed.

Experts fear that car dealership failures could increase later this year and into next as cash flows of already stretched businesses become even tighter as support ends.

One dealer group boss told Car Dealer that he thinks many car dealerships haven’t foreseen the cash flow issues they may have. 

‘I can see a problem a short way down the road,’ he told Car Dealer. ‘That’ll present an opportunity to acquire for some groups, but I simply don’t think dealers have realised the problem that is coming.’

Paul Daly, partner at accountancy firm UHY Hacker Young, said that a particular stress point will be after the September plate change.

This, combined with deferred VAT payments that will fall due early next year, and the end of the government’s furlough scheme in October, could stretch troubled dealers to the limits.

Daly said: ‘As we move to October, I foresee greater pressure as we return to more normal levels of working capital demand. However, I fear the real crunch points will be in January or April next year.

‘The VAT outflows deferred during lockdown will need to be repaid, the inevitable (for some) Q4 cash losses will have been absorbed and any redundancy costs paid out of cashflow.   

‘Given the banks’ general lack of appetite for the retail sector and weakened manufacturers who have their own liquidity positions to worry about, I can see some difficult times ahead for the most financially vulnerable dealers.’

Daly said that historically the peak cash requirements for dealers are around six-10 days after the end of each quarter.

He added: ‘There is a pinch point in March and September as these are the big registrations months with larger working capital demands, especially for vehicle bonuses which are substantial and often take some time to collect.’

Mike Jones, chairman of ASE Global, said car dealers need to ensure that the forthcoming cash flow restrictions do not catch them out.

He told Car Dealer: ‘Retailers are not necessarily out of the woods yet from a cash flow point of view, though. 

‘While trading has stopped, there has been a significant improvement in working capital for many, particularly if they are heavily into fleet, as those debtors have been collected, but this will unwind.

‘While the majority of franchises have guaranteed bonus levels, overall income will undoubtedly be lower than normal as a result of the two months of minimal activity, meaning that retailers will have to wait until October to receive any significant bonus receipts. 

‘In addition, many returning salespeople will be requesting salary advances or a switch to bonuses on order-take to supplement their income. 

‘All of this can be managed with smart forecasting and planning, potentially utilising government loans, however retailers need to ensure that none of this comes as an urgent surprise.’

Daly said that although cash flow will become tight he was hopeful the number of car dealer failures will be small.

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He added: ‘The next quarter is not anticipated to present issues primarily due to the extent of government and manufacturer support that will still be in place at that point.   

‘I do think the sector is well placed to weather a storm like this following a number of successful years that have built up its financial strength.  

‘In my view, the number of actual failures will be modest, but I foresee a number of changes of ownership as the stronger businesses take advantage of those that have been critically damaged by the current crisis.’

James Baggott's avatar

James is the founder and editor-in-chief of Car Dealer Magazine, and CEO of parent company Baize Group. James has been a motoring journalist for more than 20 years writing about cars and the car industry.

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