Car manufacturers' lure bonus payments and VAT incentives is continuing to push new vehicles onto car dealers books, the value of unsold stock rising 16% in a year according to UHY Hacker Young.
UHY Hacker Young said that the value of inventory held by UK car dealerships has now reached a record £27.3 billion – up from £23.6 billion last year – with unsold stock now equalling 17.7% of the turnover of the sector, up from 16.9% last year (see graph below).
The firm says that car dealers risk tying up capital that could be required to make investments they require in their own businesses, in their bid to meet manufacturer sales targets.
If new car sales continue to dip and dealerships are unable to shed excess inventory, they may have to explore costly alternatives to keep the stock moving such as additional discounts, or self-registration exercises, warned the accountancy group.
Paul Daly, partner at UHY Hacker Young, said: “Car makers continue to push more and more vehicles on to dealers’ books, but that can’t go on indefinitely. It’s unsustainable for unsold stock to keep rising so quickly.
“Manufacturers have traditionally used the UK market to absorb excess production from other European markets, as we tend to replace our cars more frequently than consumers in other countries do. We may soon start to bump up against the limits of that tactic.
“Pressures on dealers are higher than ever before, with manufacturers demanding bigger and better premises, and many now need to resort to significant off-site storage facilities to hold the excess stocks.”
Another issue for some dealerships, says UHY Hacker Young, is that they may have become over-reliant on the temporary cash flow boost given to them when they take new cars on to their own balance sheets.
A number of manufacturers provide their dealerships with an invoice to claim back the VAT on these purchases immediately, even though they don’t pay the manufacturers until the car is sold to a customer.
That means these dealerships receive a 20% cash boost of the value of the cars they buy through their quarterly VAT return and this is only repaid when the vehicle is sold, which could take up to six months.
This artificially flatters the cash position of the business, and the risk of this excess cash is absorbed into other activities or investment. But of course, when stock levels fall, the reverse applies and the VAT cash flows out of the business again.
Daly said: “Dealers are risking a cash flow crunch if they don’t plan adequately for the cyclical nature of getting cash boosts through reclaiming VAT on unsold cars.
“It’s a short-term relief that can cause huge problems when levels of unsold stock begin to fall again, particularly as historically these falls in stock levels tend to occur at a point in the economic cycle when dealer financial performance is under pressure generally.”