How to Manage Cash Flow for a Car Dealership
Cash flow issues can creep in fast. Maybe you’ve got vehicles sitting unsold, repair costs stacking up, or customer payments are coming in slower than expected.
Before you know it, you're juggling bills, delaying VAT payments, and feeling the pressure.
It’s a common struggle for dealerships, especially those dealing in used vehicles under the VAT Margin Scheme. Sales might look good on paper, but if your cash isn’t flowing, your business isn’t growing.
Cash flow is something you can take control of. With the right strategies and a few smart habits, you can smooth out the highs and lows, stay ahead of your bills, and make sure there’s always fuel in the tank for the next deal.
In this blog post, we are going to take a look at some of the causes of cash flow issues and share how you can maintain a positive cash flow while following all the necessary VAT rules.
Let’s dive right in then!
Why Does Cash Flow Matter So Much For Used Car Dealerships?
Cash flow is what keeps a dealership running day to day. Unlike profit, which is often calculated on paper after a sale, cash flow shows you what money is actually available to spend right now.
And in a business where vehicles are expensive and timing matters, that makes all the difference.
For UK car dealers, especially those under the VAT Margin Scheme, good cash flow is essential.
Here’s why:
Your overheads don’t wait — rent, insurance, payroll, and utilities still need paying even when cars aren’t selling.
Stock is cash tied up — every vehicle sitting on your forecourt is money that could be used elsewhere.
VAT deadlines are fixed — whether your sales are slow or fast, HMRC still expects payment on time.
Delays in customer payments can cause bottlenecks — you might be owed money, but if it’s not in your account, it’s not helping you.
Unexpected costs pop up — repairs, transport, or admin fees can hit at any time, and you need available cash to cover them.
Without consistent cash flow, your dealership might look busy but be financially stuck. That’s why understanding and prioritising cash flow is good practice and business-critical.
What causes cash flow issues in second-hand car businesses?
If Cash flow problems don’t usually come from just one thing. In most dealerships, it’s a mix of small issues piling up, and before you know it, the bank balance starts to feel tight.
For second-hand car dealers in the UK, here are some of the most common causes of cash flow trouble:
Overstocking or slow-moving vehicles – If too much of your money is tied up in cars that aren’t selling quickly, your available cash gets drained fast.
Buying vehicles without clear margins – Overpaying for stock or underestimating the resale value means you're making less per car, leaving little room to cover your running costs.
Inconsistent or seasonal sales – The business might boom in summer and slow down in winter, making it harder to plan ahead.
Poor record keeping – Without accurate books, it’s hard to spot where money is leaking out or what payments are coming due.
Unexpected repairs or expenses – One or two cars needing major work can easily eat into your monthly cash cushion.
VAT confusion under the Margin Scheme – Not separating out eligible and non-eligible vehicles properly can lead to underpaid or overpaid VAT, creating financial headaches later.
Many of these problems come down to timing. You might be owed money, or have valuable stock but if the cash isn't in your account when you need it, the pressure builds quickly.
How Can I Stay Cash Flow Positive While Following VAT Rules?
The VAT Margin Scheme is meant to ease the tax burden for used car dealers, but it doesn’t automatically make cash flow easier.
In fact, the scheme can create its own cash flow challenges if you're not actively managing it.
Here’s the real issue: because you’re only paying VAT on the profit margin of eligible vehicles, it might feel like you’re saving, but you still have outgoings that can eat into your available cash. You can’t reclaim VAT on costs like repairs or admin fees, and if you're buying multiple cars in one go, your cash can quickly get tied up in stock before anything is sold.
To stay cash flow positive while using the scheme, you need to plan around timing. Don’t just look at how much profit you're making; look at when the cash is actually coming in. Sales might be strong, but if cars are sitting unsold or buyers delay payments, your cash reserves can dry up. This is why many dealers get caught out; they’re profitable on paper, but the cash isn't in their account when they need it.
HMRC has strict VAT Margin Scheme rules, and staying compliant means keeping detailed records of your buying and selling prices. If you don’t have that info ready, you risk errors in your VAT returns and those can cause delays or unexpected payments that strain your cash flow even more.
To stay ahead, it’s important to track every transaction, forecast your incoming and outgoing cash, and set aside money for VAT, even if it feels like a smaller amount. That way, you’re not caught off guard, and you can keep your business running smoothly even during quiet sales periods.
What’s the Best Way to Handle Expenses Without Losing Track?
In a used car dealership, expenses don’t show up all at once, they trickle in from different places. One day it’s repairs, the next day it’s advertising, then delivery fees, cleaning, admin, or auction charges. And while each cost may seem small on its own, together they can quietly drain your cash.
The problem isn’t just the costs, it’s losing sight of them. Many dealers keep receipts in their glove compartments, forward the occasional invoice to their accountant, and try to remember what they spent at the end of the month. That might work when you’re selling a handful of cars, but if you're growing or even just trying to stay organised, you’ll quickly fall behind.
So what’s the solution?
Start by choosing a system that works for you. If you're not ready for full accounting software, use a simple spreadsheet with clear columns: date, expense type, supplier, amount, payment method, and notes. Make it a habit to record every expense the day it happens, even if it’s just fuel for delivery or £15 for a car wash.
Separate personal and business spending completely. If you pay for something business-related from your personal account, log it immediately. When it’s tax season, HMRC won’t accept guesses. Their VAT Margin Scheme guidance expects records to be clear and consistent
Review your sales and expenses regularly, not just monthly, but weekly or even daily. This helps you spot any cash shortages early and avoid surprises. Tools like QuickBooks or Xero make it easier to track cash flow in real time.
Conclusion
Good Managing cash flow as a car dealer isn’t just about how many cars you sell but how well you manage what’s coming in and what’s going out.
From understanding how the VAT Margin Scheme impacts your day-to-day finances, to tracking your stock purchases and staying on top of every little expense, it all adds up.
At Rhombus Accounting Firm, we help used car dealers across the UK simplify their bookkeeping, stay compliant with HMRC, and build better cash flow habits that support long-term growth. Whether you need help understanding VAT rules or want to streamline your expense tracking, we’re here to make the numbers make sense.
Contact us today to find out how we can support your business and help you stay on top of your finances.
Thanks for reading!
Meet Lewis
Lewis is a professional accountant and founder of Rhombus Accounting. He regularly shares his knowledge and best advice here on his blog and on other channels such as LinkedIn.
Book a call today to learn more about what Lewis and Rhombus Accounting can do for you.
