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2014-12-29 Using Metrics to Evaluate BHPH Performance

By Kenneth Shilson, CPA


Subprime Analytics


            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:

1.       Static pool loss rate

2.       Loss / liquidation rate

3.       Default 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.

                I recently produced a free video that is online at, 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.

                There are three important ways to use these metrics when evaluating portfolio performance:

1.       Portfolio performance measurement comparisons with industry peers

2.       Business model comparisons with industry peers

3.       Analysis of your bad-debt losses.

An additional video at, also free of charge, explains each type of analysis.

                Portfolio 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.

                Your 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.

                Understanding 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!

                NABD 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.

                At 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!


               As 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.


                Good luck!


Kenneth 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 or call 832-767-4759