Top line does not matter
I recently produced a webinar for Infor (dealer and rental software provider) where we reviewed the status of the rental markets and what the ARA crystal ball was showing for the growth of rental through 2019.
The growth numbers are pretty impressive, but if dealers in the equipment rental business think they are just going to sit back and ride the wave I would suggest that program will not work. Rental is truly a growth industry but when you take into account all the new players going into the rental business, the growth factor could provide a much more competitive environment, one that will destroy any company just trying to ride the rental growth wave.
Some of the visual materials we used for the webinar were supplied by Joe Box and Key Bank. Joe covers the rental industry and always provides current reliable data describing the rental markets as well as the public rental companies. You can ask Joe to put you on his mailing list to receive the Key Bank commentary which covers both industrial and construction markets. [email protected].
One thing Key Bank does is compare their company portfolio to the specific industry economic cycle associated with that industry, and it was interesting to note that they felt the public rental companies are at the top of their game and about to start the next downward cycle. Where do you feel your company sits in its own cycle? Probably worth some conversation at the next management meeting you convene.
My review of the EDA data in the October issue of MHW didn’t reflect anything to write home about. Kind of flat and based on what you keep hearing, the manufacturing index appears it will remain so for a while. Which is why I titled this column The Top line does not matter…..because in your business that is absolutely true. It is the gross margin line and percentage, the sales mix, the operating profit line, all of which mean more when measuring the performance of a material handling dealer. Get the sales mix wrong and the top line will really not matter.
Can we improve the top line profitably? Sure you can because it makes a lot of sense right now to continue to consolidate the industry. Money is available, interest rates low (free money), dealers looking to sell. Add in a continuation of Bonus Depreciation through 2016 (on the table) and you could conservatively increase the top line and at the same time reduce fixed costs as a percentage of the new combined sales, keep the tax bite to a minimum and generate adequate ROI’s from your investment. With all the latest technology I think it is safe to say that larger business units are more efficient to operate in this type of business.
Speaking of consolidation how did you like last month’s column? I found it quite interesting and it kind of supports that the life cycle of most business units is limited, especially those owned privately.
I guess my point about the top line is that it will be tougher to move the top line through your normal business process, and if it is more cash flow you are after you will have to do more with aftermarket products and services (John Walker tells you how), and at the same time look for acquisition candidates that will move both the top line as well as your overall returns.
On the other hand, if you are a potential “seller” it may be a good time while the funding is still available to take some bucks off the table. There are many ways to skin a cat and at the same time lower your stress factor. I do have to warn “sellers” however, that your tax position is what needs to be planned for before you do anything.
One other thing I want you to consider and that is how you would plan out your business affairs if we run into a deflationary period. In many areas of the economy it is already in the works. How would you deal with this type of situation? Most people never had to before. We are usually paying off debts with cheaper dollars…..but what if we are paying off debts with more valuable dollars. And how do these economics work in terms of payroll and other operating expenses. Top line decreases across the entire sales mix…… Interesting to say the least.
Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail [email protected] to contact Garry.
