Garry Bartecki Transitory Planning
We have been hearing the word “TRANSITORY” coming out of DC a lot lately. Transitory this and Transitory that to the point where I had to look it up to make sure what DC was inferring or talking about.
TRANSITORY– Not permanent. Brief duration. Temporary. Not persistent.
Interesting since DC uses the word TRANSITORY when discussing inflation, the value of the dollar, interest rates, unemployment numbers, and so on in response to Fed numbers which seem to indicate inflation, the value of the dollar, material costs, fuel costs, and interest rates are starting to head in the wrong direction. From what I have been reading that seems to be the case and after adding in Stimulus dollars and the Infrastructure dollars it kind of makes sense that we will have a lot of dollars trying to buy goods or invest in the market.
Costs and interest rate increases seem to be real with the value of the dollar becoming more volatile than anticipated. You feel it every day. Gasoline prices, material costs to build and service your product lines, a slowdown in purchase delivery’s, a lack of chips, wage increases, projected tax increases including a “driving” tax (to pay for infrastructure bill) all have been increasing and show no signs of backing off even though DC says they are transitory and scheduled to reverse shortly.
So, industry leaders have two choices to consider. Believe these “transitory” increases will soon return to normal with zero interest rates, 2% inflation, and reductions in your current costs of doing business. Or believe these cost and tax increases are here to stay to the point where planning for them to stay is required. I believe the latter course of action is the one to take even if you believe these financial metrics will reverse the course and not require any action to protect your balance sheet and income statement. But better to be prepared than find yourself behind the eight-ball a year from not unable to pay your bills or meet bank covenants.
What makes this planning exciting are price changes dramatically moving up at unprecedented rates, making it almost impossible to bid jobs unless they have a Cost-Plus adjustment to capture price increases incurred to protect your margins.
With this type of activity taking place annual budgets may be a think of the past for a while. You may be better off using 13-week budgets and cash flows to capture what is taking place currently. Then slowly move back to a more formal budget process once your cost structure and activity return to “normal”.
Both balance sheets and income statements tend to deteriorate during times like these. Not only do we incur unplanned cost increases, but also delays in finishing a job, or delays in delivering new and used units. And let us not forget that your rental costs will increase as well. In short, costs are jumping around and mostly increasing while at the same time billing gets delayed, both of which causing reduced profits and cash flow. Bottom line: less cash in the bank and higher inventory cost levels requiring additional financing and interest costs.
Let us recap the impact on your Balance Sheet.
- Cash- down
- A/R- Down because of delayed billing and up from price increases
- Inventories- Higher, which may cause a problem once prices settle down
- Rental Fleet- Costs higher
- Fixed Assets- Cost increases with a higher cost to operate
- A/P- higher
- Accrued expense- higher
- Notes payable-higher.
- Equity- most likely takes a hit.
How about the income statement?
- Sales down due to delays. Up from price increases
- Higher Cost of Sales. Higher cost of inventory
- Higher labor costs due to extended time to complete job
- Travel costs higher- increased fuel costs
- Higher interest expense- higher rates and additional inventory to finance
- The actual cost to service rental units may be higher than the contract amount
- Higher-income taxes being discussed
- Bottom line- most likely takes a hit
And even if cost transitions back to pre-pandemic levels dealers may wind up with inventory costs higher than normal on the books that get costed out at higher than anticipated costs which reduce margins.
Needless to say, using annual budgets does not work under these circumstances. Shorter budget periods a must. In addition, cost and inventory controls are more important than ever because you do not want unit or parts costs on your books that destroy your normal expected margin rates.
Transitory planning for short periods necessary for the balance of 21 and probably 22. Transitory revenue planning required to offset volatile cost activity.
Hope you had a chance to read Part 1 of Job Shock. Part 2 now available.
