OK, So Which Is It? - On The Numbers
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SECTION: On The Numbers

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OK, So Which Is It?

Written By: GARRY BARTECKI

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


Don't panic, but don't relax either - diligence and vigilance are what's in order now.

Recession or soft landing?
Read the papers and I am sure you are all opening the windows getting ready to jump. Listen to the economists and you start pulling yourself back in but are still ready to take the dive at the least provocation. All contractors and equipment dealers are nervous. Depending on your area of expertise and location many of you have a reason to be. It's going to be one of those years where you need to keep focused on your backlog and cash flow.


Here is a summary of key points I am considering:

Equipment shipments
-Heavy equipment - good for '08
-Light equipment - weak
Equipment pricing
-Heavy - firm
-Light - weak
Spending on transportation construction
-Double-digit growth
Spending commercial construction
-Single-digit growth
Housing starts
-Less then 1.2 million


Not as bad as I thought. If you are in commercial, road and industrial markets, 2008 may not be too bad. In the housing market it will depend on if your area is already overbuilt and needs some time to correct. If the Fed steps in to ease the foreclosure issue, housing may rebound sooner than we think.

While some aspects of this market can be bad, there may be opportunities to consider as well. Certain types of equipment will be available on attractive terms. Interest rates are also attractive at this time. Rental rates may also reflect market conditions, and commodity prices may decrease because of lower demand.

What do we all have to do? Budget to take into account a lower sales volume for 2008. Take into account what it will take to earn the sales, use your variable cost of sales to determine gross profit, deduct personnel cost, occupancy costs and all other operating costs including interest expense and taxes.

Next, calculate your cash flow to see if collections cover expenses plus debt service. Don't forget, cash flow is what matters, and it is the only thing that matters. It is not unusual to reflect book profits and go broke at the same time.

Probably the best way to understand your cash position is to project your balance sheets using your normal turnover ratios. This exercise is one of the best you can do if you want to really understand your business.

But what if you find your lower sales projections do not generate adequate cash flow? Not a pleasant thought, but if it happens it is time to reduce cash outflow. It is best to start with debt service by selling equipment with low utilization, or by selling off various paid-off units to pay down debt. You may also look to refinance now because banks have a need to look for new business. Next, you want to trim payroll and use outside contractors where possible. You want to keep your equipment, then rent it to other parties to generate cash. Last, review operating expenses to see if all expenditures are truly necessary at this time.

There is probably not one income statement line item you can't reduce in some way, shape or form.

On the balance sheet side you need to bill As Soon As Possible without fail. Get those receivables booked and then follow up religiously for collection. Take cash, checks and credit cards; whatever it takes. Also, be conservative on the inventory and work-in-process side. Do not take on inventory levels you cannot handle. Keep the asset side of the balance sheet under control and you will sleep better.

On the liability side you know which vendors you can stretch and which ones you can't, and I am sure you all know not to mess with the payroll taxes. If you need to stretch some vendor, then at least tell them and meet your payment date. By now, you should be getting the drift of things - bill and collect sooner than you have to pay your bills. If you can do that, you can ride out the storm. If you can't, additional action is required that will be tough to deal with.

Get your business under control. Know what is coming in and going out every day. Check that billing is being done daily. Review the checks going out personally. Have a running cash balance at your disposal. Know what you owe and when. And finally, have a game plan in mind should further adjustments be required.


 


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Article Categories:  Financial  »  Management