charging interest on parts inventory

[dwood]

Has anyone heard of a delaer charging interest to the parts depr for you current inventory value as shown on the financial statement each month. My contention is that if this was such a good idea GM would reccomend it and other dealers certainly would be doing the same thing. Amy thoughts pro or con on this subject? I am on a fact finding mission as my dealer has started doing this and it seems to me that this not correct. I contend that this puts the dealer at a disadvantage because it is going to scew the results of 20 group comparisons and other reports he gets to compare our parts dept to all other dealerships. What does everyone think?

[Gary J. Naples]

dwood,

I'm assuming this interest expense you refer to is on borrowed capital used to purchase the inventory. Only your dealership accountant, senior management or dealer principal can tell you for sure. Start there it may provide the answers to your questions.

Nevertheless, it is considered a legitimate expense, and how it is expensed is an individual business decision as long as it conforms to GAAP (Generally Accepted Accounting Principles.)

Gary J. Naples
GNA

[davis.rl]

dwood:

I believe that the sooner every manager understands that money has a cost the healthier most dealerships would be. If the dealer has his cash tied up in parts inventory he has the right to charge that department interest. Why is it that in most cases only the new car department pays interest on their inventory? Sometimes the used car departments pay interest for any cars they have floored. Perhaps a better idea would be to charge interest only on excess inventories, whether it was parts, used cars, wip, etc.

Larry Davis

[partmandan]

Charging the parts department interest?
I thought that booking inventory appreciation and or depreciation on a quarterly basis covered this concern.Why would you pay additional interest when book value generally increases from original purchase price from the manufacturer. Maybe suggest an alternative such as:
1. Department spiffs on no special ordered parts older than 30 days.
2. 10% or less of total inventory dollars over 12 months not sold.
3. Take surplus money found in scrap parts and inventory overages and use the funds to diminish non-returnable inventory.
4. Contact Parts Voice on their 50% buy out program with participating dealers who purchase obsolete and slow moving inventory at 50% of dealer cost.

partmandan@aol.com

[fburrows]

There is a growing trend among larger parts departments for the dealer to charge interest on the inventory. I am most familiar with GM dealers and this charge is obviously not spelled out in the accounting manual. The charges are being accessed regardless of whether the capital is the dealerships or borrowed. I guess if it happens, the parts manager has to make sure that if the change affects his pay plan, he negotiates an adjustment at the time of the accounting change.

------------------
Frank Burrows
Automotive Business Solutions
frank@autobusiness.org

[Doug]

The idea of interest of your inventory doesn't sound all that far fetched....no more so than being charged rent, I suppose.

As far a skewing 20 group comparisons.....what else is new? I love 20 group stuff but let's face it, various dealers alter accounting in SO many different ways that many of the numbers are skewed to begin with.

Doug

[ekfr]

of course interest for inventory is parts expense, no dealer and i mean no dealer owns
their parts inventory, where they choose to put the expense is their chose but it belongs
against the appropriate dept. if your paid on net there could be a hidden agenda. however consider your last three paychecks sitting on the parts shelves collecting dust,
maybe its possible to get it to 2 paychecks or one and a half, this is the typical thinking of gms and owners.

[SD]

Part Man Dan (and others): You talk about inventory pricing adjustments in your response. I'm a new Controller in a dealership. Could you discuss this a little bit? It is not GAAP accounting to base inventory at replacement cost. Is that what you are refering to? Is that the industry standard? Thanks for any help!