Interest on a Floor Plan

Here’s the breakdown:

1. Profit Accounting (Gross Profit / Operating Profit)

• Gross Profit = Sales – Cost of Goods Sold (COGS).

  • COGS includes the vehicle’s purchase cost (what you owe the manufacturer/lender when the car is sold).

  • Floorplan interest is not part of COGS because it’s not tied to the intrinsic cost of the car — it’s the cost of financing inventory.

• Operating Profit = Gross Profit – Operating Expenses.

  • This covers payroll, rent, utilities, advertising, etc.

  • Some dealerships do put floorplan interest here if they treat it like a cost of running the dealership, but most separate it.

2. Floorplan Interest (Financing Expense)

• Classified under “Interest Expense” in the income statement.

• It sits below operating profit (in the “Other Expenses” section), because it’s a financing cost, not an operational one.

• This gives a cleaner view of how profitable the dealership is from operations versus how much carrying inventory costs.

3. Why Separate?

• Lenders, investors, and auditors want a clear view:

  • Are you making money selling cars? → Look at gross & operating profit.

  • What’s the cost of keeping cars on the lot? → Look at floorplan interest separately.

• Many dealer financial statements (per NADA standards) explicitly break this out as “Floor Plan Interest Expense.”

👉 In short: treat floorplan interest as a separate line item (interest expense) — not part of profit accounting. It impacts net profit, but not gross or operating profit.

Do you want me to sketch out a sample dealership P&L layout (with where floorplan interest shows) so you can see it in context?

A floorplan is basically a giant credit line that dealerships use to buy and hold inventory (cars, RVs, boats, etc.) before they sell them.

Here’s the breakdown:

🚗 What It Is

• A short-term revolving loan from a bank or captive lender (like GM Financial, Ford Credit, Ally, etc.).

• Dealers use it to purchase vehicles from manufacturers (new) or auctions (used).

• Instead of paying cash upfront, the lender fronts the money, and the dealership pays interest (and sometimes fees) until the car is sold.

📦 How It Works

1. Dealer orders cars → manufacturer ships them straight to the lot.

2. Lender pays manufacturer on the dealer’s behalf.

3. Vehicle sits “on floorplan” until it sells. The dealer owes:

   • Principal (the vehicle cost).

   • Interest (charged monthly or daily).

   • Sometimes curtailments (scheduled partial paydowns if the car sits too long).

4. Dealer sells the car → customer pays (cash or financing).

5. Dealer pays off the floorplan loan immediately from proceeds.

6. Profit left = sale price – vehicle cost – floorplan interest – other expenses.

💰 Why Dealers Use It

• Cash flow: They don’t tie up millions in inventory.

• Flexibility: Revolving line means they can constantly stock new cars.

• Scalability: Bigger lot = bigger floorplan = more sales potential.

⚠️ Risks

• Aging inventory → the longer a car sits, the higher the interest (and curtailments).

• Market drops (e.g., used car prices fall) → dealer can owe more than car is worth.

• Audit risk → lenders regularly audit lots to ensure cars are there; missing vehicles = “sold out of trust” (a cardinal sin in dealership land).

👉 Think of a floorplan like a giant dealer credit card just for vehicles: you swipe it to stock cars, pay interest while they sit, and pay it off when you sell.