Garry Bartecki Screwy numbers
I spend a good couple of hours each day reviewing stock markets and other investment commentary. Always loved investment adventures and even produced my MBA thesis discussing the merits associated with distressed long-term bonds. And guess what? For the period I was covering returns from buying distressed long-term bonds produced above average returns if you select bonds of companies that have a good chance of covering their debt service and paying off the bond on the original due date. As it turns out there is a service available to find the “good” distressed bonds if you are interested.
During my daily review of the market, I keep hearing about this Company and that Company reporting earnings for the month or quarter. It seems the most important number is the sales number and how sales have increased consistently over the last couple of years. Thinking about that I say to myself, “If inflation hit 30% for inventory and other operating costs should I not have an increase in sales, even if unit sales took a hit?” HHHHHMMMM?
Next question is: If sales increased, did I make more money?
Next question is: How about additional cash flow? Considering that every $ of increased sales requires more capital to support it, how did I make out having a larger floor plan and higher AP balances. It is no secret that you need to spend money before you collect money, and thus the increase is working capital to cover the spread.
Next Question is: Even if you believe you covered the price increases for new and used equipment, did you Increase margins enough to cover increases in operating expenses, payroll, and interest expense.
It is also a time to compare actual activity along with sales dollars:
- Did you sell more new units and maintain margins?
- Did you sell more used units and maintain margins?
- Did you sell more parts and maintain margins?
- Did you sell more hours and maintain margins?
- Was your overall required gross margin attained?
- Does the total gross margin cover total operating expenses including interest?
And when you consider that last question about covering total operating expenses and interest you must understand that this is a moving target since the monthly inflation rates keep jumping around, which means pricing may need to be adjusted throughout the year as expenses keep increasing. For example, if you have new units costing $20000 in your inventory and then received a delivery with a cost of $26000 and your goal is a minimum 13% gross margin on the sale, the selling price on the $20000 unit would be $23000 with a $3000 margin, with the newer more expensive unit requiring a $29900 price and $3887 margin at 13%. All in all, the cost, sales and gross profit all increased 30%, leaving you with an additional $887, some of which will cover increased expenses such as floor plan interest, insurance as well as contribute to expense increased operating expenses.
You must go through this exercise for each profit silo to determine if the overall results and better than the previous year as well as the current year budget. If you are not careful this could turn into a full-time job. Maybe you can get AI to help you.
If you are like the car dealers many of you are sitting on these high price units you ordered that you eventually received a year late, leaving you wonder what you are going to do with them. This is a BIG DEAL because Sally down the street avoided the high price unit problems and is now ready to sell units for less than you can. Now what? Do we give up the business? Do we take a hit on the sales? Do we buy Sally out? I guess you have some play with the pricing but wish to avoid giving up that $887 if you can help it. Do these enough times and the margin for the year will turn downward. And considering that new and used sales drive aftermarket sales, you do have to be careful not to upset the apple cart.
What you do not want to do is sit on these higher priced units. The pricing will only get worse as time moves on. And I assure you that your banker will eventually ask you to pay down the units to an acceptable collateral number. So, it is better to find some kind of solution now to avoid a hit to the cash account.
What to think about:
- Are there dealers who need inventory you can sell to at your cost to get it off your balance sheet?
- Can you work out a rental program using these units where you can transfer part of the risk to a future period?
Can you sell off rental assets that are priced at the current levels and replace them with the new units to rent them out to pay down the units to a value where you can be competitive with pricing?
Can you get the OEM to help?
You also must consider these same issues with your parts department. You have parts at the old low cost mixed in with a good percentage of newer parts at the higher prices. If you’re using the first-in first-out method to account for parts costs, your current sales and going to look good but it will not look so good when the lower priced units are gone leaving you with a parts cost 30% higher when we are probably in a recession where business is slowing up at the same time. And consider that your customers will not what to pay the “higher” parts costs. It’s funny how they always have a handle on this sort of transaction.
And if the economy does slow down with inflation following along, it probably means we are in a recession where you will start hearing the word “deflation” caused by vendors trying to unload excess inventory. Will it happen in your industry…. probably.
The trick her is to create a moving 12-month budget and cash flow, which you keep adjusting to incorporate the plan to adjust inventories and cash flow without damaging your balance sheet, which means the budget must be accompanied by a projected balance sheet for each month projected. You may also wish to prepare notes to share with bankers and OEM’s showing them how you handled these moving cost numbers while still producing a profit to cover operating expenses and interest expenses.
AI …. Where are you?
About the Columnist:
Garry Bartecki is a CPA MBA with GB Financial Services LLC and a Wholesaler columnist since August 1993. E-mail [email protected] to contact Garry.
