Testing the 31 Percent SolutionBy Garry Bartecki
Article Date: 04-01-2010
Copyright(C) 2010 Associated Equipment Distributors. All Rights Reserved.
Actual CE dealer data reveals how much you need to cut in order to compensate for lost sales dollars.
Last month I made reference to a comment made by John Hoffecker of AlixPartners at AED's annual Summit Meeting in San Antonio. Among the many conclusions John drew from AlixPartners' Heavy Equipment Study (see last month's column), one stood out and I thought I would put it to the test concerning AED equipment dealers.
The statement was: You need to reduce expense by 30 percent of every dollar of sales you lose. Sounds reasonable, but does it apply to our AED dealers? I guess there is only one way to find out and that is to perform an analysis using the Cost of Doing Business (CODB) survey and see what happens. So that is what I did.
If you review the chart below, you can see I summarized the sales mix, gross profit margins and operating expenses for a $50 million dealer compiled from data found in the 2009 CODB, which reports 2008 operating results. A "typical" dealer in 2008 reported a 1.7 percent income before taxes, or $845,000 on $50 million in sales.
Pushing ahead into 2009, I reduced sales by 40 percent and recompiled the sales mix and margins, but left the operating expenses at the same levels they were in 2008 to demonstrate the catastrophic results this economic downturn can have on our typical dealer. As you can see, the 1.7 percent NIBT turned into an 11 percent loss of $3,420,000, a real challenge to deal with if one hopes to survive.
So if you buy into the 2009 sales mix for our $50 million dealer the question is: Do you have to reduce expenses 30 percent for every dollar of sales you lose? In this case the answer is No. Our sales in this analysis decreased by 40 percent, or $20 million. Twenty percent of $20 million calculates out to a reduction of $4 million, which in this case is $600,000 higher than what we need to break even. Using the $3,420,000 against the $20 million sales reduction, we wind up needing an 18 percent reduction in expenses to break even.
Using the CODB further, I next made an attempt to "adjust" my 2009 expense levels to make up for the loss the dealership would incur, keeping the 2008 expense levels in place. The CODB contains departmental data that provides sales per employee and stats for each department, along with payroll cost for each department. For example, I noted the decrease in service revenues and calculated, using the $137,000 billed per tech data found in the CODB, to note that I should lower the number of techs by four. Using the same section of the CODB, I was able to determine that these four techs would save me approximately $175,000 plus direct expenses – or $225,000. Moving on, I reduced the remaining payroll by 20 percent and offer up the adjustments for occupancy cost, other operating expenses and interest expense. Adding it all up I only come up with about $2 million in savings, leaving another $1.4 million to deal with.
When you take a business doing $50 million and suddenly experience a 40 percent reduction in sales it is going to be very tough transitioning into a $30 million business. But if you don't make the transition you experience losses for book purposes and put an impossible strain on cash flow. Those with a strong balance sheet and some flexibility to reduce fixed cost beyond the adjustments I have displayed in the analysis can probably ride it out, but it will even be a strain for them if indeed this turnaround takes four or five years to get us back to 2007-08 levels.
Another key comment John Hoffecker made was, "The new normal is going to be a lot lower than the old normal." In other words, over time you'll want to reorganize your business to operate and be profitable at $40 million and not wait to get back to the $50 million level.
We figured out two things:
We need to reduce expense 18 cents for every dollar we lose.
You can use AED's Cost of Doing Business survey to help adjust your game plan for the future.
My advice to you is: Participate in the 2010 CODB report. If ever there was a year you need to do this it is 2010!
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