Motor retailers have weathered the COVID-19 storm remarkably well so far following a sustained period of decline in new car registrations.
In 2021 year to date, new car registrations have seen an increase of 2.8% from this time last year (source: SMMT October registration data). Although this is in comparison to a rather unusual 2020 to say the least where retailers were closed for several months. However, registrations remain consistently below the levels achieved in previous years and October 2021 registrations are 24.6% down on the same month in 2020.
These results are being distorted by the ongoing new car supply problems due to the much-reported semiconductor shortage. Despite these issues, many retailers have found themselves reporting record results for the last 12 months.
The increase in electric vehicle purchases continues to drive registrations and with the launch of E10 grade petrol hitting the pumps in early September this may act as a further catalyst for change to drivers of older cars. For those driving older motorcycles check you compatibility with E10 fuel carefully.
Profitable used car sales appear to be driving a positive period for retailers able to source stock and fund stock. Used car values have rocketed as consumers, impatient to wait for a new car and seeking to avoid public transport, fuel demand. This is showing little sign of slowing but stock availability and rising purchase prices add further complexity to retailers planning for the future.
With the shadow or blinding light of agency frameworks (depending on your viewpoint) looming into view and digitalisation continuing apace, retailers are facing a period of monumental change in the type and way cars are sold, whether new or used.
Can these sales levels be maintained?
There are a number of challenges being discussed at board meetings:
- New car handover dates are subject to change with expected delivery volumes being reduced and lead times regularly extended. This is unlikely to have been helped by the current shortage of HGV drivers in the UK.
- Used car values are likely to plateau at some point but with the cost of acquiring stock coming more in line with selling prices the impact on profit may be subdued.
- While electric vehicles in many forms are generating new car sales they still represent only 44% of all UK registrations so far in 2021 but the rate of growth is significant. The UK charging infrastructure remains fragmented and has not gained the full confidence of the UK consumer – evidenced by registrations being skewed towards hybrid models as opposed to pure electric.
- Digitisation of the sales and marketing process making use of the data retailers hold will continue to advance, allowing for greater visibility on transaction detail and identification of trends.
- The move towards an agency model by many OEMs is accelerating but many issues remain to be resolved, both legally and practically.
All these issues make planning for the future extremely challenging for operations and finance, with little historical comparisons with which to benchmark possible performance. However, underpinning any future business plans will be cash flow and ensuring the business has the funding to achieve its profit and value generation objectives.
As the UK adapts to a post COVID-19 world, if such a thing ever exists, the trading landscape has its own challenges common to most retailers.
- The anticipated bounce back of the UK economy with further restrictions being eased is positive for high streets and hospitality business but remains fragile. The return of Scottish pupils to school in August fuelled a spike in coronavirus cases and these results were replicated as English schools return. As we write, unless the situation significantly worsens into the winter season, it is unlikely that any widespread financial support measures of the type we have seen over the last 18 months will be further extended, or reintroduced.
- The ending of Government support measures at the end in September brought a hefty dose of reality to many businesses who were reliant on them for survival. What the impact may be on employment and disposable income remains uncertain but inflationary pressures are increasing.
- Recent studies suggest that consumer demand for goods is declining in preference of spending on experiences now that greater freedoms are returning. This may be helping suppress the current inflation rates seen in recent months.
All these issues makes careful working capital management and the creation of contingency plans essential if retailers are to avoid an unexpected run on cash resources.
Finance savvy retailers will have carefully preserved cash during the past 12 months, having taken advantage of one or more Government support schemes. The challenge now is to ensure that future cash flows are available to fund the payment of any additional debt, or debt deferrals, taken on.
Cash flow management
The cash that has flowed into motor retailers has been very welcome and at a time when it was most needed. It would be easy to become complacent with cash and costs, especially at the individual site level. Processes and budgetary control in larger groups needs to be reinforced.
In our experience, the management and forecasting quality of cash flow by retailers varies enormously. For some cash flow forecasting is in the ‘too hard to get right’ box and therefore no forecast is prepared. On the flip side, there are those who can confidently predict, almost to the pound, the immediate short term cash requirements.
One thing that is clear, is that management of cash should be a core part of managements’ efforts in all dealerships and groups.
Benefits of reliable cash management
Knowing your current and anticipated cash position:
This allows management to make spending decisions to take advantage of opportunities in the knowledge that cash resources are available.
- avoids surprises that can cause unrest and concern in teams
Late creditor payments and restrictions on trading caused by cash flow issues is demotivational to staff members and can cause concerns over job security.
While this sounds counter intuitive, being able to anticipate cash requirements and knowing working capital is under control frees up management to focus on growth and operational matters.
- can reduce the cost of funding
Being able to demonstrate sound financial management can de-risk a position for a lender, allowing them to be more flexible when pricing facilities.
As with lenders, accurate and efficient cash management demonstrates to investors that any investment will be in good hands.
Cash forecasting is not just about best practice in a business-as-usual situation. At the more distressed end, careful cash flow management can make the difference between existence and insolvency. Where decisions need to be made about which creditor to pay, how wages will be met and the level of funding support that might need to be raised, poor cash flow forecasting can cause business terminal consequences.
What should retailers be doing now?
Despite the current positivity, we recommend that retailers use this time to evaluate their current cash flow forecasting processes to ensure they are still relevant and fit for purpose. The trading environment continues to evolve with the removal of Government support. This will also lead to deferrals becoming due and the commencement of repayments for any additional debt.
A good cash flow forecast is primarily an essential tool for management use but when designed and communicated well, it will also be capable of sharing with external shareholders.
A good cash flow should:
- be simple to update and read
- be of a sufficient period to cover a working capital cycle
- include an explanatory narrative on what the forecast is showing, suggested actions and key risks or uncertainties
- be built on clear assumptions with capacity to easily amend and test scenarios
- include references to source material, such as aged creditor reports, historical KPIs, sales targets. This would ideally be linked directly to the dealer management system
- clearly show the level of headroom management have available.
The forecast will be used by management to ensure the business has sufficient liquidity, but also to identify where improvements to liquidity can be made and act as an early warning where standards may be slipping.
Critical to accurate cash flow management is designing a robust process that can be routinely followed and will highlight deviations.
This requires detailed understanding of the levers that trigger both inflows and outflows. For example, this may be logging of a used car on the stocking plan, the registration of a new vehicle or the placing of a parts order. With the advances in dealer management systems, retailers have an abundance of data on expected delivery dates, leads and workshop activity. This should be utilised in full to create an integrated cash flow forecast that can be easily updated.
Underpinning the numbers should be a practical set of procedures that optimises positive cash flow.
Layering on to this is the strategic decisions influencing dealer profitability and which may restrict some decisions. Is sufficient used car funding available? What is the impact if lead times for new cars are further extended? Could the business withstand a COVID-19 outbreak in the workshop? Can the business afford to restructure its staffing levels post furlough support? Does current lending need rescheduled?
Knowing your cash position generates confidence. Confidence to trade positively, take advantage of opportunities and secure better terms with creditors. It also generates confidence in the business and management team from external stakeholders like franchisors, lenders and shareholders.
While cash generation has been strong, history tells us the good times do not last forever. The best retailers will have planned for this and will be best placed to ride the waves. You can be sure that good cash flow forecasting will be part of those plans.
For further information or to discuss any of the issues raised above please contact [email protected].