Cost Of Doing Business Analysis - On The Numbers
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SECTION: On The Numbers

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Cost Of Doing Business Analysis

Written By: Gary Bartecki

Article Date: 08-01-2005
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.

How to improve operating results.

What kind of year did our industry experience in 2004? How does your dealership measure up according to product type and length of selling season? What kind of sales increase or decrease did dealers experience in 2004? Did gross profits increase dramatically in 2004? All are questions you need to know the answers to in order to measure your 2004 results, and so you can make the appropriate adjustments to your 2005 plan.

If I asked you what you thought happened in 2004, what would you say? I did this exercise myself with the intent of comparing my selections against AED's 2005 Cost of Doing Business Report. I expected:

  • A sales increase.
  • Better overall margins.
  • Higher total receivable balance.
  • Faster inventory turns.
  • Higher rental utilization rates.
  • A higher pre-tax profit percentage.
  • A higher absorption factor.

How does your list look? What do you have that I don't?
My reasoning for my selections was:
Sales Increase - It was no secret sales were up for most types of equipment. And with equipment sales up, used sales and rental should have picked up as well. Parts and service would follow. 2004 should have been a great year!

Better Overall Margins -Tight supplies of both new and used equipment made for better deals and thus better margins. Better dollar and time utilization of rental assets also generated better margins. More work equals more demand for service and parts, which leads to better mechanic utilization and more parts sales per parts employee.

Larger Receivable Balance - More equipment sales, more rental sales, more parts and service sales, all at better pricing than the previous year leads to overall higher sales and thus, a larger overall receivable balance. Larger receivable balances cause cash shortages that are hopefully overcome with line-of-credit financing.

Faster Inventory Turns - A strong demand for equipment accompanied by a shortage of supply will deplete inventory levels and thus, increase turns. Increased turns lead to lower capital requirements to operate the business and increase over-all ROE.

Higher Rental Utilization Rates - This is a tough one but I believe the end result will be higher utilization rates. On the other hand, with equipment demand high, units may be converted into sales sooner or equipment never gets into the rental program at all. The equipment that is part of the rental program, however, will enjoy a higher utilization rate.

Higher Pre-Tax Profit - Higher sales, better margins and similar fixed-cost levels equal higher pre-tax results as a percentage of sales. Just has to be.

Higher Absorption Factor - Absorption is calculated as the amount of operating expenses absorbed by gross profits generated by the parts, service and rent-to-rent departments. If sales in these three departments increase over the prior year and maintain similar margin percentages, they will absorb a higher portion of operating expenses and push the absorption factor higher.

Those are the reasons I selected the results I listed above. Think through your expectations and do the same.

Now, let's compare operating results in the 2005 CODB on 2004 results against the previous year.

Well, there certainly was an increase in sales ranging in 2004. Margins, and I can't believe this, actually went down. How can that happen when there is a shortage of product, used pricing firmed up and demand in general was up? Did we give it away when we didn't have to?

Receivables as a percentage of total assets stayed about the same. Good for you, you kept up with your collection policies. Inventory turns did improve as expected creating more cash flow.

Utilization rates for both rent-to-sell and rent-to-rent units improved. Nice improvements.

Absorption stayed the same and again I don't get it. Perhaps sales from equipment is such a large part of total sales that the increase in sales in 2004 offset gains in aftermarket products and services.

And where it all counts, pre-tax profits, there was approximately a 60 percent increase to 2.5 percent in 2004 from 1.6 percent in 2003. For the high-profit dealers, pre-tax profit was approximately 5.6 percent for both years.

I did pretty well. Gross profit margins were the only line that is completely out of character with 2004 market conditions. Margins on new and used equipment sales in 2004 should have been up substantially and dragged along the other departments to increase the total gross margin.

What do your results show? If they are similar, please take a look at your 2004 margins compared to 2003 and let me know why they did not increase as expected. I would really like to understand.

This is just one example of how to use AED's Cost of Doing Business Report. If you take the time to carefully review the results of 143 participants, especially the statistical data, you and your management team will have a much better understanding of how the business runs and how to improve operating results. Give it a try.

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