Garry Bartecki Transitory my _ _ _!
Well, let’s start by saying that cryptocurrencies are here to stay and somewhere, somehow your company will be called upon to complete a transaction using crypto. Never thought it would happen this fast but with the continued inflation talk one way to protect your buying power is to use a product that holds its value no matter how much the value of the dollar decreases.
What led me to this conclusion? Basically, the investment newsletters I receive recently all had Crypto type investments to consider. In addition, my latest issue of Forbes has a young man on the cover (29 years old) who started a company called FTX, which is a crypto exchange where traders can buy and sell digital assets such as Bitcoin and other cryptocurrencies. FTZ handles about 10% of the $3.4 T (that is Trillion) market of futures and options trades crypto traders use each month. Big numbers! Consequently, this young man is worth $26 B as of this date. If crypto can generate that kind of value for a service provider these crypto companies are surely becoming an acceptable means of transferring value.
Then I saw where contractors are using Crypto to purchase materials as well as receive Crypto as payment for services rendered. A masonry contractor in fact. If a masonry contractor uses this process, I suspect many other contractors will jump on the bandwagon. And, of course, we assume the value of the Crypto will increase in value as the value of the dollar falls as a result of another trillion dollars added to our money supply. Interesting, especially for those of you doing business with offshore vendors or customers. Probably worth the time to investigate further.
Next on my list for this month is the “transitory” talk regarding inflation, general price increases, and how long the inflation levels (some say 5-7%) will hold until they return to a more normal 2%. Everything I read and hear about tells me the supply chain issue will remain for another two years. And because of shortages every one of you will experience cost pressures which you can hopefully pass on to the customers. And then they speculate that once the demand/ supply issue reverses we may even experience a recession. What fun owning a company that buys offshore products, has products that use the major industrial materials that are already at high price levels, has a need for trained personnel to service customers, and has to carry substantial inventories which are financed by bank debt where interest rates are sure to increase as means to curb inflation. If these issues were something you could reasonably plan for you are in a position to control whatever they throw at you. But the issues we face today are not “normal” and require closely managed companies to stay ahead of the game.
To see what may happen to your financials under these conditions I prepared a simple balance sheet and income statement to determine how inflation will impact your financial stability. To get going I calculated the inflation impact for 10 years using 2% per year and also 5% pre year. After 10 years at 2%, the $1,000 current cost would increase to $1,200. Not bad. Something you can handle. But at 5% the $1000 cost becomes $1,550 (a 55% increase) that will necessitate a much higher degree of financial management. Would be great if you could get a dealer projection model where you could use all the variables and estimate profits and the balance sheet impact. The profit planning model would do for a start as long as you gross up the figures used to calculate ratios. The model I am referring to appears in the annual MHEDA Disc Report.
The problem going forward relates to your ability to pass on increased costs to customers have the service capability to maintain your normal above-average performance, turn your inventory levels and still make an adequate profit to support this new business structure.
My concern is the Balance Sheet. The cost of every non-cash asset category will increase not because you are buying more, but because they cost more per unit. Consequently, the liabilities will mirror what happened on the asset side and in addition incur expected interest rate hikes that will eat up cash. In the end, I see both the cash balance and the equity account not moving much even if sales increase. Remember the old saying ….and it is true that FOR EVERY DOLLAR OF SALES THERE IS AN ADDITIONAL CAPITAL REQUIREMENT. I remember years ago when I did a presentation titled HOW TO SELL YOURSELF INTO BANKRUPTCY, demonstrating how additional sales require more cash to cover the time you have to pay for items sold versus the time you collect from the customer. In short, you could have a great sales increase and run out of money, which is close to what I see if here if a substantial inflation rate sticks.
Ways to mitigate this capital shortfall is more use of technology to improve productivity which will decrease the cost of doing business. Another is to manage inventory levels, which includes refurbing used units or rental fleet units to sell, which probably would be seen as beneficial since customers are in the same boat as you are. Another is to adapt to electrical units. Another is to clean up the rental fleet and used equipment inventory and covert as much as you can into cash. All of which assists with the “gap” referred to above.
Stay on top of your game and be prepared no matter what the economy throws at 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.
