By Kenneth Shilson, CPA
As this year closes, buy here, pay here (BHPH) operators
will review their year-end results. This usually involves looking at financial
statements, preparing tax returns, and studying vehicle sales numbers. None of
this information evaluates the performance of a BHPH operator’s biggest asset –
their installment contract portfolio!
The use of three basic metrics is the only way to
evaluate portfolio metric performance. These three basic metrics are needed to
measure portfolio performance:
pool loss rate
/ liquidation rate
The static pool loss rate measures the severity (in
dollars) and frequency (in vehicle units) of losses – either before or after
recoveries – over the life of the portfolio.
The loss / liquidation rate measures the pace of losses,
both before and after recoveries, during the economic life of a portfolio.
The default rate measures the frequency (in units, not
dollars) over the economic life of a portfolio. It is the most frequently
considered measurement of portfolio quality.
recently produced a free video that is online at www.subanalytics.com, which explains and illustrates each
calculation. If you are not familiar with these computations, I encourage you
to view the
video, and to attend one of my free webinars on this
subject. The next webinar will be on January 8, 2015. Call my office at (832)
767-4759 for more information.
are three important ways to use these metrics when evaluating portfolio
performance measurement comparisons with industry peers
model comparisons with industry peers
Analysis of your bad-debt losses.
An additional video at www.subanalytics.com, also free of charge, explains each
type of analysis.
measurement comparisons determine the percentage of your portfolio that is
liquidated, and whether your originations are replacing those liquidated
contracts. In addition, the loss rate calculations (static pool and loss
liquidation) are used to measure and forecast profitability and cash flow, or
to determine the return on your portfolio investment.
business model is a critical element in achieving positive portfolio
performance. Although many different business models are used in BHPH today, it
is important to ascertain the cash efficiency of your own model. Cash
efficiency equates to higher returns on portfolio performance when operators
also control the losses with prudent risk management techniques.
bad debt losses is important if you want to avoid repeating them! Using a
consistent underwriting approach can be fatal if it results in increasing losses.
An analysis of bad debt losses allows an operator to make periodic adjustments
in underwriting that may be needed to address customer and economic changes in
the market. The more you learn, the more you earn!
publishes annual industry benchmarks that can be used to evaluate your own
portfolio performance against the national averages. However, each operator
must first determine his own results to utilize them.
the NABD “Best Practices Conference” in Dallas
on January 18-20, I will provide updated benchmarks for 2014 and – for the
first time – benchmarks for lease here, pay here (LHPH). The LHPH benchmarks
will be particularly useful for operators who currently use the LHPH model or
are considering adopting it!
you close 2014, do not overlook evaluating your own portfolio performance using
the three basic metrics. These measurements are considered credible in
providing business intelligence, helping to identify loss patterns and trends,
and improving your underwriting.
Shilson, CPA, is President of the National Alliance of Buy Here, Pay Here
Dealers (NABD), which will host a BHPH Conference at the DFW Hilton Lakes
Executive Center in Dallas, Texas from January 18-20, 2015. For registration or
more information, visit www.bhphinfo.com or call 832-767-4759