Garry Bartecki Been here before
Most people reading this probably have been, and again, the younger members of your team may not, and could probably use some education to help them be more effective in this current work environment.
What I am planning to discuss this month is how the lift truck industry fared during the last financial fiasco (2008-2009) compared to what you are experiencing this time around (2020-2021 and maybe 2022). Neither event was pleasant, and most dealers found ways to manipulate their internal and external responsibilities to make it to 2020 for the start of the COVID-19 pandemic and related shutdowns and work from home scenarios. I guess if you are reading this that you were probably one of those that survived the former but still fighting through the latter.
I went through both and believed (2008-2009) was easier to deal with even though it took five years in some cases to turn the corner. This time around there is more “change” associated with just about every industry, more technology developed to assist coming out of this situation in better shape than expected, much deeper declines in business and cash flows which could have caused more bankruptcies had it not been for PPP1 and PPP2, significant supply chain disruption and the related price increases caused by supply chain disruption.
Many very serious economic roadblocks to deal with. But you would never think there were any by looking at the stock market. Crazy, crazy times.
And to finish off our current situation you have to manage for either deflation or inflation, where making an error with either scenario could generate major cash flow problems.
In a previous month, I mentioned either or both deflation or inflation would surface and probably both because deflation could be caused by the supply chain issue or if and when the Fed increases interest rates which could cause a recession, while on the other hand inflation is being caused by the supply chain issues but also because of the number of dollars being printed cause a demand/supply problem with more dollars chasing fewer goods. I little nuts but issues demanding planning for each scenario.
One way to plan where you are and where you are going is to go back to your 2008-2009 financial statements to see how they compare to where you are now. You could also get into your 2010-2011 financials as a way to see how to plan for 2022 -2023. It will also be informative to see how your business has changed in the interim. Sales mix. Absorption rates. Payroll costs. Insurance costs. Benefit costs. I mention the income statement items but maybe more importantly are any differences associated with your Balance Sheet.
Let us spend some time with the Balance Sheet.
I am going to suggest what changes you will see without even looking at the two different statements (2021 vs 2010).
I expect less cash on a normalized basis (before you take out discretionary $) because the pandemic provided much tougher economic problems to work through
AR collection periods extended compared to 2009. Also, the AR per customer could be lower because your ability to deliver products and services was hampered by the supply chain issue.
The cost of inventory, both new and parts, are higher and hopefully, you can sell them at what you paid for them. This will be a major issue for the auditors this year.
If you had a lot of used inventory going into the pandemic it probably declined in value and has now starting to recover from a value standpoint. Again, this will be an audit issue as well as a collateral issue with your bank. This was a major issue in 2008-2009 mostly resolved by selling off fleet to pay down the banks, only to have to repurchase those units 24 months later.
Be best to spend some time on your parts and used equipment inventories to support the valuations they are sitting at. How you cost them. How do you account for sales (first-in or last-in or some combination thereof? Annual equipment appraisals performed by a party that knows your business helps if the bank recognizes the appraisal as an expert.
I will guess that equipment rental is providing a higher % as part Total Sales. This is a good place to find underutilized capital. Make sure you need what you have in the fleet. If not, move it before the auditors tell you to write it down. And the appraisal of rental units is as important as it is for used equipment.
If your rental fleet has increased in size and you are using term loans to finance them, be aware that the increase in rental assets can lower your working capital number and raise a red flag to the bank. Pure rental companies do not calculate current assets and current liabilities because the current liabilities for fleet notes have a negative impact on your working capital calculation caused by having 100% of the fleet as a long-term asset while the related notes (current portion) sit in a current asset category.
We can go on and on, but you must realize that NOW is the time to have a Clean Balance Sheet where you are aware of your shortcomings that will reduce the amount of cash they generate, as they move from inventory to the cash account. So lay both Balance Sheets side by side and see where you stand, and then compare to the MHEDA cost study, especially the top 25% category.
Some good news. The new lease accounting mandate is being deferred until your 2022 statement (if you are on a Dec 31 year-end). But, as long as you are reviewing the Balance Sheet you should take a shot to see how it will look once the leasing mandate is adopted and see what it does to your bank covenant ratios.
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.
