BHPH Report April 2014 : Page 1

Compliance Dialogue Highlights NABD Academy & National Conference Agendas Webb Sees 2014 Tax Season Refunds on Par with Year-Ago Level A Publication of NABD and SubPrime Auto Finance News 4 6 Craigslist Marketing Continues to Evolve 10 April 2014 | Volume 1 | No. 4 Why Making Realistic Projections Benefts Operators By Nick Zulovich, Editor OVERLAND PARK, Kan. — From job interviews to self-help books, stirring goal-oriented conversations sometimes start with the question, “Where do you want to be in fve years?” In the buy-here, pay-here busi-ness, it’s sometimes difcult to project that far into the future in a market when elements such as down payments and collections can fuctuate quarter-to-quarter. Nonetheless, BHPH specialist Brent Car-michael from NCM Associates preaches the importance of making projections on an an-nual basis whether the operator has a single lot with a trailer and 10 vehicles in invento-ry or a company with dealerships in multi-ple states and millions in its portfolio on the street. “I think it’s a very relevant topic, espe-cially with how sophisticated and competi-tive our business is these days,” Carmichael told BHPH Report . “Tis is something that all dealers need to sit down and project their business at least for the next year. I’m not a big believer on looking three years down the road or fve years down the road because business dynamics change way too much, even ours, believe it or not. Tere’s changes year-over-year, whether it’s cost of cars, un-derwriting or collection practices or sales processes. Tose are little things that can re-ally change a model. “I always look 12 months into the future and then by looking at least the past three “I think it’s a very relevant topic, especially with how sophisticated and competitive our business is these days. ” Brent Carmichael, NCM Associates years or fve years in the past to look at if this is even achievable for what’s going on in the current market,” he continued. Beginning Steps to Projections Carmichael ofered some suggestions on how BHPH operators can go about mak-ing annual projections, even if they already do so. He insisted that the projections have “to make sense,” and shared how the pro-cess unfolds with 20 Groups NCM Associ-ates hosts. As the groups are organized by deal-ership size, each participating operator is asked to submit the number of units they’re going to sell each month, the number of accounts they’re going to charge of each refned but still remained daunting. “We start compiling everything about the middle of February, and we fnished just before March 31. Tat’s been very con-sistent with the timetable from prior years,” Shilson said. “As the buy-here, pay-here industry proctologist, it’s my job to analyze the data and see what happened. Some-body has got to do it. I feel that’s my job. It’s a big job. It’s time consuming. It takes KEN SHILSON a lot of work from a NABD lot of parties, but it’s what I do,” he continued. Shilson insisted that for a number rea-sons, the BHPH benchmarks paint a clear picture of how a wide selection of operators month and the number of accounts that are going to pay of each month. Ten these proposed projections go into the dollars operators seek to collect each month and what their monthly expenses are going to be. Carmichael also wants operators to consider what their cash-in deal is going to be on a per-unit basis. “What we do from a cash-fow stand-point, we don’t have them do any excises from a proftability standpoint because proft is great, but it’s obviously a capital-intensive business,” Carmichael said. Carmichael recollected the projection he saw from 20 group operators who forecasted what they expected to generate in 2013. PROJECTIONS continued on page 2 Newest Benchmarks Set to Summarize 2013 Industry Trends for BHPH Dealers By Nick Zulovich, Editor HOUSTON — For the 16th consecutive year, Ken Shilson will share buy-here, pay-here industry benchmarks as a part of what he believes are the most accurate gauge of how the industry behaved on an annual ba-sis. Te founder of the National Alliance of Buy-Here, Pay-Here Dealers used a food ref-erence to summarize what he is fnalizing to share at NABD’s National Conference next month in Las Vegas. Shilson told BHPH Report that “2013 was a very challenging year for buy-here, pay-here because special fnance companies were very aggressive in putting deep subprime customers in new and late-model vehicles and talking subprime customers into vol-untary repossessions. In other words, turn-ing back their existing car to get a new one from them. “Tey took a big bite out of the buy-here, pay-here apple. However, they’re having a difcult time swallowing it,” he continued. Te benchmarks include a wide array of information, including average down pay-ments, collection performance and invento-ry acquisition and recondition costs. NABD along with Subprime Analytics and NCM Associates take much of the frst quarter to assemble and analyze the data from the pre-vious year, a chore that Shilson said has been performed to provide a refection of what the entire industry did in 2013. “First of all, the fnancial results focus on the best operators, the most successful oper-ators, not the average of all the operators. We look at the results from the best, and we iden-tify and study what they do. Ten NCM sur-veys all of their 20 Groups so they get a cross section of all their buy-here, pay-here mem-bers so that gives you a perspective of a cross section of operations are doing,” Shilson said. “Ten we use Subprime Analytics to get an even bigger cross section,” he continued. “We have a large database, and we’re looking at a lot of diferent operators nationwide, not just those in the same 20 Groups. We’re look-ing at operators from coast-to-coast as we’re looking at their portfolios for them or fnan-cial institutions. We have a wide spread of operator data that we’re looking at. BENCHMARKS continued on page 2

Why Making Realistic Projections Benefits Operators

Nick Zulovich

OVERLAND PARK, Kan. — From job interviews to self-help books, stirring goal-oriented conversations sometimes start with the question, “Where do you want to be in five years?” In the buy-here, pay-here business, it’s sometimes difficult to project that far into the future in a market when elements such as down payments and collections can fluctuate quarter-to-quarter.

Nonetheless, BHPH specialist Brent Carmichael from NCM Associates preaches the importance of making projections on an annual basis whether the operator has a single lot with a trailer and 10 vehicles in inventory or a company with dealerships in multiple states and millions in its portfolio on the street.

“I think it’s a very relevant topic, especially with how sophisticated and competitive our business is these days,” Carmichael told BHPH Report. “This is something that all dealers need to sit down and project their business at least for the next year. I’m not a big believer on looking three years down the road or five years down the road because business dynamics change way too much, even ours, believe it or not. There’s changes year-over-year, whether it’s cost of cars, underwriting or collection practices or sales processes. Those are little things that can really change a model.

“I always look 12 months into the future and then by looking at least the past three years or five years in the past to look at if this is even achievable for what’s going on in the current market,” he continued.

Beginning Steps to Projections

Carmichael offered some suggestions on how BHPH operators can go about making annual projections, even if they already do so. He insisted that the projections have “to make sense,” and shared how the process unfolds with 20 Groups NCM Associates hosts.

As the groups are organized by dealership size, each participating operator is asked to submit the number of units they’re going to sell each month, the number of accounts they’re going to charge of each month and the number of accounts that are going to pay of each month.

Then these proposed projections go into the dollars operators seek to collect each month and what their monthly expenses are going to be. Carmichael also wants operators to consider what their cash-in deal is going to be on a per-unit basis.

“What we do from a cash-flow standpoint, we don’t have them do any excises from a profitability standpoint because profit is great, but it’s obviously a capital-intensive business,” Carmichael said.

Carmichael recollected the projection he saw from 20 group operators who forecasted what they expected to generate in 2013.

“Then I went back and looked at their past three years’ average on what they had done during each of those months for each of those different thing,” he said. “It was eye-opening to about 70 percent of them that they were projecting a 2013 that was going to be better than any three-year period that they had ever done. Then they had to go back and take a look at it and see what makes sense. If I sell 25 percent more cars, how am I going to do this year with the market the way it’s been in the last three years and not been able to grow the business?”

Carmichael then explained why operators’ projections ended up being so far apart from actual performances.

“It needs to make sense in that it has to be achievable. There’s no reason to set pie in the sky expectations if you can’t get there. I’m not just talking about profitability and cash flow. I recommend that dealers under promise and over deliver when it comes to cash flow,” Carmichael said.

“With the dealers I work with, we try to set up on an ongoing basis working on projecting and budgeting,” he continued. “I have about a dozen who have me come out at least once a year, sometimes twice a year when it’s time to do their projecting and budgeting, and we sit down and hammer out what their business is going to look like for the coming year. What’s the volume going to look like? What’s the profitability? What’s it going to cost to run that business?

“We want to make sure that it makes sense because they’re going to take that to their people and they’re going to expect their people to live up to that expectation so it’s got to make sense,” Carmichael went on to say. “It can be just something that’s way out in left field, saying, ‘Guys we need to sell more cars so next year we’re going to sell 25 percent more cars.’ OK great, how?’”

Projections Key for Capital Increase

Carmichael stressed several times during a conversation with BHPH Report about how much buy-here, pay-here is a capital-intensive business. He pointed out that having accurate projections can be an element to help operators secure more capital to growth.

“It’s probably one of the most important aspects because any lending institution is going to look at profitability,” Carmichael said. “Those lenders that are more connected to our business, Texas Capital, Spartan Financial, a lot of those are going to understand that the financial statement itself, the profits and losses, are not necessarily an indicator of how healthy the business is.”

“But your regional banks, your local banks, that’s the one thing they really take a look at is pure profitability. As far as projections are concerned, we would never recommend someone to make less money. But store that makes less profit doesn’t mean it’s a less valuable business,” he continued.

Carmichael went on to explain how a BHPH operator can use annual projections to educate a lender about the business to make the dealership a better investment prospect.

“The key moving forward is when we’re trying to secure capital from a projection standpoint is to show the bank what that return on investment is going to be,” Carmichael said. “What is my cash flow going to look like on the $1 million you’re going to give me because some banks are going to want a finite note, saying you have seven years to pay back this many million.

“Those are more in tune with our industry understand that it may not necessarily be paid back all in a lump sum but rather used to increase the return on investment in that business. It’s very important to establish that while we are a profitable business, that in of itself is not the only indicator that the business is healthy,” he went on to say.

Read the full article at http://digital.subprimenews.com/article/Why+Making+Realistic+Projections+Benefits+Operators/1688826/205719/article.html.

Newest Benchmarks Set To Summarize 2013 Industry Trends For BHPH Dealers

Nick Zulovich

HOUSTON — For the 16th consecutive year, Ken Shilson will share buy-here, pay-here industry benchmarks as a part of what he believes are the most accurate gauge of how the industry behaved on an annual basis. The founder of the National Alliance of Buy-Here, Pay-Here Dealers used a food reference to summarize what he is finalizing to share at NABD’s National Conference next month in Las Vegas.

Shilson told BHPH Report that “2013 was a very challenging year for buy-here, pay-here because special finance companies were very aggressive in putting deep subprime customers in new and late-model vehicles and talking subprime customers into voluntary repossessions. In other words, turning back their existing car to get a new one from them.

“They took a big bite out of the buy-here, pay-here apple. However, they’re having a difficult time swallowing it,” he continued.

The benchmarks include a wide array of information, including average down payments, collection performance and inventory acquisition and recondition costs. NABD along with Subprime Analytics and NCM Associates take much of the first quarter to assemble and analyze the data from the previous year, a chore that Shilson said has been refined but still remained daunting.

“We start compiling everything about the middle of February, and we finished just before March 31. That’s been very consistent with the timetable from prior years,” Shilson said.

“As the buy-here, pay-here industry proctologist, it’s my job to analyze the data and see what happened. Somebody has got to do it. I feel that’s my job. It’s a big job. It’s time consuming. It takes a lot of work from a lot of parties, but it’s what I do,” he continued.

Shilson insisted that for a number reasons, the BHPH benchmarks paint a clear picture of how a wide selection of operators performed to provide a refection of what the entire industry did in 2013.

“First of all, the financial results focus on the best operators, the most successful operators, not the average of all the operators. We look at the results from the best, and we identify and study what they do. Then NCM surveys all of their 20 Groups so they get a cross section of all their buy-here, pay-here members so that gives you a perspective of a cross section of operations are doing,” Shilson said.

“Then we use Subprime Analytics to get an even bigger cross section,” he continued. “We have a large database, and we’re looking at a lot of different operators nationwide, not just those in the same 20 Groups. We’re looking at operators from coast-to-coast as we’re looking at their portfolios for them or financial institutions. We have a wide spread of operator data that we’re looking at.

“Being a CPA, we take great care in the policies and practices that generate the numbers. That’s what really differentiates us from anybody else who is doing this. They’re not studying and analyzing the policies and practices that were used to generate those numbers. We study them and make sure the numbers are consistently determined, not just thrown together,” Shilson went on to say.

“Of course because of the breadth of data we have, we’re able to look at the trends and patterns, which I think gives you a good perspective on what happened and what’s going to happen,” he added.

And not just to benefit of BHPH operators directly, Shilson pointed out that these benchmarks are also by other industry experts such as ADESA’s Tom Kontos, Tom Webb of Manheim and analysts at Experian Automotive.

“I want them to see what’s going on in this sector of the industry, and they’re sharing with me what’s going on in the market. That’s a very important part of it. Obviously, ADESA and Manheim have terrific data on inventory and vehicles, which others don’t have,” Shilson said.

“I definitely respect the data Experian puts out on the automotive marketplace. I’m glad they’re following the buy-here, pay-here sector, and I do look carefully at their automotive data every quarter to see what’s happening and what the trends are,” he continued.

Read the full article at http://digital.subprimenews.com/article/Newest+Benchmarks+Set+To+Summarize+2013+Industry+Trends+For+BHPH+Dealers/1688827/205719/article.html.

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