Been on my excessive reading binge and thought I would convey some of the ideas and thoughts being discussed and kicked around to maybe help material handling C-level management focus on specific areas to improve profits and cash flow.
Since you will be reading this column in the spring of 2014 I would be remiss if I didn’t update you on the tax comments in past columns, which mostly indicated higher tax costs for 2013 and thus lower cash flows. Consequently, I refer you to two comments in AED’s monthly Washington Insights which highlights the (1) Senate Reform Plan which targets MACRS, LIFO, LKE and more as a way to lower the corporate tax rate. (see http://www.aednet.org/government/aed-washington-insights.cfm#ref2.) And (2) the House Tax Committee Request to Clarify the 3.8% levy on Rental Income. (see http://www.aednet.org/government/aed-washington-insights.cfm#ref5.)
My personal discussions with a member of the House Tax Committee confirmed that “EVERYTHING” is on the table to increase tax revenues to pay for lower corporate rates. Not a bad idea if all equipment dealers were C-corps, but they are not. Most are S-Corp’s or LLC’s which are flow-through entities which means higher taxable incomes generated because of the tax changes flow through to the individual rates of the shareholders or members, at a much higher rate then what is being proposed for C-Corps.
The 3.8% levy on rental income is a live issue for 2013, with rental income including both the taxable income from rental operations plus the tax gain on the sale of rental equipment. I included this document because I have a number of dealers say this does not apply to them. I beg to differ, because there are few exceptions to the rules and those exceptions deal with the length of rental contracts or the fact that the rental operations are insignificant in terms of your total operation. In short, if the majority of your rental contracts meet the seven or 30 day tests they are “rental” for this tax regulation. As you can see reading the attachment both AED and ARA are working to fix this mistake in the tax code.
I also came across a Modern Distribution Management article outlining a distributors’ top concerns for 2014, which also included a segment about changes participants made in 2013 to make their firms more successful. Some survey participants invested in new talent and training while others eliminated staff and reduced costs to streamline operations. There was also strong support for making technology investments to improve efficiency and gather more business intelligence. In all these cases it appears that “lean and mean” is still the law of the land. Another big focus point for 2013 was sales force and marketing realignment because we all know we have to do more with less and grow by taking market share from competitors.
In terms of 2014 concerns, it seems we are in a rut because the issues mentioned are what you have been experiencing for the last five years.
- Finding talented help
- Competitive pricing/margins
- State of US manufacturing
- The slow economy
- Market consolidation
- Commoditization of products
- Regulatory landscape
- How to grow in a shrinking market
These are complex issues, many of which are beyond your control, but need to be considered as part of your business risk assessment that is part of your annual or strategic plan. We discussed risk assessment last month and how important it is to minimize costly mistakes. I hope all of you take risk assessment into account when planning future events or programs.
On the positive side George Prest is taking MHI head on into planning for the material handling industry challenges through 2025. There is little doubt that material handling, logistics and supply chain management are on an upswing especially if US manufacturing follows the globalization trend which will bring more activity to the US because of our low energy costs. To date their studies reflect that the growth opportunity is there with technology leading the charge to allow companies to operate more effectively while still offering up customized services. I can’t wait to get their final report. It should be quite interesting.
I also spent some time with MHEDA’s DiSC report and have to tell you that if you are not participating in this tool you are doing yourself and your management teams a disservice. This document should be provided to each department head with the responsibility to report back to the COO why their numbers differ (either positive or negative) from the benchmarks provided in the report. I know that every dealer accounts differently for just about every type of transaction but the DiSC report will still point out results that need further review and find you ways to improve operating results. From my experience you will find substantial dollars from participating in this report and spending some time on the KPI’s that matter. I guarantee it!
What to expect in 2014? I am betting revenues increase, but margins will not. Dealers will need to protect themselves from overleveraging their balance sheets and remaining lean. Selling more but making less margin does not work if you think it will improve the bottom line.
And don’t forget to review your 3.8% tax levy position and document it so you have it ready if the IRS asks about those “passive” rental activities you engage in. Now is the time to let your elected reps know how you feel about those tax issues.
It may be time to look at converting back to a C-corp.
Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail email@example.com to contact Garry.
Links to the articles that Garry mentioned in this article can be found in his article on the Material Handling Wholesaler website at www.mhwmag.com.