I have to say the economy seems to be improving. Maybe not a lot, but it is better than it was a year ago. With any luck the trend will remain upward and increase in business will exceed the productivity gains made over the last four years and companies will have to start hiring again.
Manufacturers seem to be upbeat, expecting a better year in 2012 even though their dealers may not see it the same way. I am sure some dealers are in locations where business will show above average growth and other locations will remain flat. One thing for sure, it’s location, location, location that will make a difference in 2012.
It also appears that product support work is strong and will continue to be until customers are once again ready to invest in new equipment. Current customer fleets may be getting old but the units may not have many hours on them since factories and warehouses were running at less than capacity. According to our friend John Walker product support is so good in some areas that it is demanding more than 100% of the service department capacity, and had
Most dealers have thought through the 2012 sales expectations using an income statement format and filled in the balance of the revenues and expenses to the best of their ability. Some have taken a cautious approach while others have been more aggressive. I think we can agree that for many dealers there is a chance to achieve healthy growth numbers in 2012. The question is, have they determined how much annual growth they can handle and for how long.
Proper growth planning calls for a coordinated approach using the balance sheet, income statement and cash flow projections. As we have repeated previously, your present capital base can only support a limited amount of growth using internally generated funds before additional outside capital is required to move forward. This is especially true in a dealer environment where the largest sales component generates the lowest gross profits. Or said another way, if the growth comes primarily from product support and rental the length of time before the capital squeeze hits may be pushed further out.
Let’s face it, everybody took a hit the last four years, and most likely the capital base of the business is less than it was four years ago. So, for example, if sales fell by 30% and operating losses reduced capital, that capital you had to support that additional 30% of sales is no longer available. In other words, you need to go through the exercise to determine how much growth you can handle before a cash shortage develops. You do this by using the balance sheet, income statement and cash flow projections to see when that happens.
Most financial experts will call for five years of projections using varying sale mix assumptions and overall growth rates to determine when the growth increases the solvency risk of the business. How this would work is you have to prepare your assumptions for balance sheet changes, income statement results and the cash flow impact for each sales silo in the business. That may mean worksheets for sales, parts, service, ST rental and LT rental with maintenance. The trick is to apply the normal standards and operating ratios to each sale item in order to estimate the timing of cash transactions. What also needs to be taken into account is your borrowing base, revolver loans, term loans and related covenants. Inflation factors as well as pricing increases also need to be taken into account. In the end this endeavor will show you when internally generated funds will no longer support additional growth. It may be two years from now, or four years from now, or it may be next year if the depression really took a bite out of your capital base.
All of you are aware of what Big Al (Al Bates) says about this issue…..grow the business a few percentage points more than inflation and keep a two point spread between the sales increase and payroll cost. Do that and you will be in the High Profit category in the DiSC report at the end of the five year period.
Do yourself a favor and do this analysis to see how high you can climb.
Garry Bartecki is a CPA MBA with GB Financial Services LLC. You may contact him by e-mailing email@example.com.