The Planning Countdown Has Begun - On The Numbers
Construction Equipment Distribution magazine is published by the Associated Equipment Distributors, a nonprofit trade association founded in 1919, whose membership is primarily comprised of the leading equipment dealerships and rental companies in the U.S. and Canada. AED membership also includes equipment manufacturers and industry-service firms. CED magazine has been published continuously since 1920. Associated Equipment Distributors
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SECTION: On The Numbers

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The Planning Countdown Has Begun


Article Date: 11-01-2007
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.

But you're not ready to plan without the current CODB report in hand.

So what about 2008?
Guess it depends on what you do, where you do it and how good you are at it. Once you figure out where you stand on these three issues I guess you should start planning for next year. No matter what, you should definitely complete your 2008 business plan within the next three to four weeks.

Numerous speakers at the recent AED Executive Forum said there was nothing on the horizon to indicate a material reduction in construction activity. Again, they did emphasize overall local conditions could be different and the type of work could generate different results. These differences were well documented from discussions with construction equipment dealers from diverse regions, many of whom were experiencing considerable drops in equipment sales and some at levels similar to 2006. Some, on the other hand, were experiencing business increases.

The analysts and market forecasters both indicated that the financial results for 2006 and 2007 were affected by market anomalies related to a bloated housing market resulting from aggressive financing programs, and that once these unique circumstances corrected themselves it would be back to business as usual. The question, of course, is: What is "business as usual" for you?

If 2006 was an anomaly and 2007 is the start of an adjustment period, where do we go from here?

No matter what condition you currently find yourself in, you have to start thinking about 2008. One speaker recommended that you ignore the anomaly and plan 2008 using 2003 and 2004 sales levels. For those of you still going strong, you have to assess whether this level of activity can be maintained for the next 18 months. If so, prepare the 2008 operating budget assuming any sales correction will be minimal. The rest of you can start with either 2003 or 2004 levels or maybe the average of both years. AED's Cost of Doing Business survey indicates that compared to 2006 sales, 2003 sales were 40 percent less and 2004 sales were 26 percent less. Some of you are probably below the 2004 levels currently but can probably expect a rebound to the '03-'04 levels in 2008.

If we assume you plan to budget for a 25 percent decrease in 2008 you have a lot of work in front of you to realign your financial position. In addition, you need to consider changes in the credit markets, interest rates, receivable management, inventory levels and general balance sheet management to preserve proper cash flow.

These are steps to take to ensure a proper analysis:

1) Prepare your sales mix projections and work backwards to determine what payroll levels you can support at these lower sales.

2) Project your remaining payroll requirements and compare to both sales and your gross profit calculations. Per CODB, total payroll expenses (other than techs) for 2003-2004 should be about 10 percent of sales, or 49 to 50 percent of gross profit.

3) Compare remaining expenses to the 2003-2004 levels per CODB.

4) Next, do the same for the balance sheet to ensure that both the income statements and the balance sheet are in sync.

5) Also, prepare cash flow statements to see if further adjustments need to be made or banking arrangements adjusted to meet your requirements.

You cannot just go back and use your 2003-2004 budgets or income statements without further adjustment because just about every line item has changed since then. Thinking it through you may need to perform at 2004 sales level (in 2008) with fewer people because costs have certainly increased. Do not ignore any line item - review them all.

Just a reminder: AED's 2007 Cost of Doing Business report has a four-year trend analysis starting in 2003 and ending in 2006. This section of the report contains all the ratios and productivity stats you find in the current report. You could use this data as a benchmark for your 2008 analysis.

In addition, AED has both a Business Segment Analysis report and an expanded Profit Planning Model to help you analyze your sales mix as well as projected returns on assets and equity. The Profit Planning Model has been expanded into an industry-specific balance sheet and income statement format to provide a full set of dealer financial analysis to assist with the planning process. These reports can be purchased from AED's home page at - click on the CODB order button.

No matter what condition you currently find yourself in, planning for 2008 is a must considering the unique financial and market conditions we find ourselves in.


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Article Categories:  Business Outlooks  »  Financial