You’ve probably heard the term liquidity when talking about business finances. But what does it actually mean for your dealership?
At its simplest, business liquidity is about having access to cash when your business needs it. For an independent dealer, having access to cash can matter when you’re balancing inventory purchases with payroll, reconditioning, transportation and other expenses.
Understanding your liquidity can help you think about how much flexibility you have to handle your dealership’s day-to-day needs and new opportunities.
What Does Liquidity Mean for a Dealership?
Think about the cash your dealership can access when you need to cover an expense or make a purchase.
That’s what your business liquidity is.
A dealership may own valuable assets, including the vehicles on its lot, but having money invested in inventory isn’t the same as having cash available to use elsewhere in your business.
For example, you might need cash available for payroll, facility expenses, vehicle transportation, reconditioning or another inventory purchase.
Understanding your liquidity can help you see how much flexibility you have to manage those different needs.
Liquidity vs. Cash Flow: What’s the Difference?
Liquidity and cash flow can be easy to confuse because both relate to your dealership’s finances. But they tell you different things.
Cash flow looks at money moving into and out of your dealership over time. Vehicle sales bring money in, while inventory purchases and other business expenses send money out.
Liquidity is about the cash your business can access when you need it.
For example, your dealership could be generating sales while also having a large amount of cash invested in vehicles on your lot. Cash may be moving through the business, but some of it may be tied up in inventory so you can’t access it immediately.
Want to learn more about managing money moving through your dealership? Explore our blog on cash flow best practices for used car dealerships.
How Can Inventory Affect Your Liquidity?
Inventory is an important part of your business, but buying vehicles can also require a significant amount of cash.
When you pay cash for a vehicle, that money is invested in the unit until it sells. You may also have expenses tied to getting the vehicle ready for customers, such as transportation or reconditioning.
That doesn’t mean paying cash for inventory is necessarily the wrong choice. It simply means that how you purchase vehicles can affect the cash you have available for other dealership needs. Maintaining healthy business liquidity ensures you aren’t leaving your dealership strapped for cash when vehicles take time to sell.
Keeping that in mind can help you look at an inventory purchase alongside the other expenses your dealership is managing.
Want to learn more about the expenses that can go into a vehicle? Explore Beyond the Purchase Price: Understanding Used Car Inventory Costs.
Why Can Liquidity Matter When You’re Buying Inventory?
Inventory opportunities don’t always show up at the perfect time.
You may find a vehicle that fits your inventory strategy while you’re also managing expenses like payroll, reconditioning work, facility expenses or other business needs.
Understanding your liquidity can help you consider how a new inventory purchase fits with those other priorities.
The goal isn’t to keep every dollar sitting in your bank account. It’s to understand where your cash is going and what cash you have available as you make decisions for your dealership.
Use Floorplan Financing to Help Keep Cash Available
Paying cash isn’t the only way to purchase inventory.
Floorplan financing gives eligible dealers access to a line of credit designed specifically for vehicle inventory. Instead of using the full purchase amount from your cash, you can finance eligible vehicles.
Using a floorplan may help preserve cash for other dealership needs while giving you purchasing power when inventory opportunities come up.
Want a deeper look at inventory financing? Explore What Are the Benefits of a Dealer Line of Credit?
Keep More Cash Available for Your Business
Liquidity is one part of your dealership’s finances. Understanding it can help you see how inventory purchases and other expenses affect the cash you have available for your business.
AFC’s flexible floorplan financing solutions can help you finance eligible inventory while keeping cash available for other dealership needs.
Learn more about AFC floorplan financing or get started today.
Frequently Asked Questions About Liquidity
What is liquidity in business?
Business liquidity is about having access to cash when your business needs it. For an independent dealership, that cash may be used for purchasing inventory for your lot, payroll, reconditioning, transportation and other business expenses.
What’s the difference between liquidity and cash flow?
Cash flow looks at money moving into and out of a business over time. Liquidity looks at the cash a business can access when it needs it. Both can give you different information about your dealership’s finances.
Why does liquidity matter for an independent dealership?
Liquidity can help you understand how much cash you have access to as you balance inventory purchases with other dealership expenses. That can give you more information to consider when making decisions for your business.
*Disclaimer: AFC does not guarantee any results for floorplan financing and examples are for illustrative purposes only. Dealers should consult their own advisors to make independent business decisions regarding floorplan financing and inventory sourcing. “AFC” refers to Automotive Finance Corporation, Automotive Finance Canada Inc., and AFC Cal, LLC in their respective jurisdictions.
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