Still Scary, But It’s Getting BetterBy Garry Bartecki
Article Date: 02-01-2010
Copyright(C) 2010 Associated Equipment Distributors. All Rights Reserved.
Make sure the business you chase is business worth having.
Here we are in 2010 and we are still not sure if the light we see is a train or the end of the tunnel. What do you think?
I am seeing positive signs that management is taking hold of the reins once again and getting back control of their companies. They are:
Telling the sales staff to stop giving away the inventory.
They are firming up rental rates.
They are upgrading staff.
They are preparing realistic cash flow budgets.
They are reviewing procedures to become more efficient.
They are working with their banks.
They are looking for “value added” opportunities.
They are tightening credit terms.
Through Dec. 31, 2009, many companies were giving away the store to get business, issuing credits for any reason and allowing payment terms into the next century. Guess what? They figured out they can’t do that anymore because the reserves are running out.
I believe some leaders figured out they could make more money with less business that is good business as opposed to chasing every dollar out there, increasing variable costs and then earning profits that don’t even cover the variable costs – more business, more inventory, more people, more equipment, more financing, more of everything except cash flow.
The folks chasing good business are doing just that. They have a marketing plan, know how they fit in, know they have the ability to service the business and go after their targets. They also know who they need to refer to their competition. Let’s face it, we all know of certain customers we would be better off without. The sales department just doesn’t want to give up the revenue dollars, do they? But if their comp plan was based on gross margin contribution they might think otherwise.
A number of dealers have reviewed their sales comp plans or all incentive plans to pay for what they need in 2010. What we need in 2010 is new business, but new business from the type of customers we want. So you pay for new business and you pay for gross margin performance, and maybe you also throw in a cash receipts component, and all of a sudden you start getting more of that business. It’s amazing how that happens.
Credit also has to be firmed up. No more sales of anything to a person or company that has not completed a credit application properly filled in. Again, if the sales staff understands that the sale will not happen unless this is done, it will get done. The credit check process is also being reviewed with many companies using one of the “instant” services to get ratings.
Wording in the invoice or rental contract is also being updated to contain personal guarantees (in appropriate circumstances) and stronger lien rights to increase the ability to collect for outstanding receivables.
CEOs are also finding some very good sales and operational folks available in the market. With the right incentive plan that keeps fixed costs down they are hiring the experienced sales people to increase market share. Their primary job is to bring in new business that meets the criteria noted above. With the right incentive plan this is a risk worth taking.
I bet you have been seeing more “lean” articles lately. I know I have, and they are very similar to what AED was promoting for the last year or so. And finally, management is getting the message because they want to continue to operate with the lower cost base they have been using the last 18 months. Who wouldn’t? Hey, get more business and keep costs steady. Sounds good to me. But, to maintain appropriate service levels with a smaller staff becomes an issue, forcing management to sit down to see what they can do better.
And then we get to financing. Still a mess, but hopefully if you are still in business you must have been doing something right and are over the biggest hurdles. But who knows, so it is important to review cash flow on a monthly basis against a cash flow budget to make certain you will not have a problem meeting note obligations. But if you may have a problem on the horizon it would be best to see what you can do to fix it before you have to talk to your banker. Let me give you a hint here: Never use the word restructure in any conversation when your banker is in the room. In short, if you have not attempted to fix the problem and are feeling the pain, don’t expect any help from your bank.
This year is still a bit scary and proactive dealers are going to kick it up a notch to gain market share, improve margins, improve cash flow, upgrade employees and learn to operate in a new environment.
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