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August 2018
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Time to do some of that financial stuff!

-Complete internal financial statements and supporting schedules for June and then Q2.
-Time to review actual results against the plan for 2018.
-Time to update the plan for the rest of the year with specific goals in mind.
-Time to review new and used sales results to see which sales personnel need help.
-Time to check out what inventory you have and what you have ordered for the rest of the year.
-Time to review the rental fleet to see which units will be turning over within the next 12 months.
-Time to decide which rental units should be sold off.
-Time to set aside some time to study what technology you can make use of to make the company more profitable and easier to do business with
-Time to study what the competition is doing in terms of new technology.
-Time to consider getting an annual appraisal report for rental units as well as used equipment inventory.

It is also time to prepare reports required by your banks, primarily financial covenants regarding debt service coverage ratios as well as debt to equity ratios.

And finally, it is time to get the management team together to discuss what has happened so far and what to expect for the balance of the year.

I want to get into the covenants a bit more, but before I do that I want to remind you again to ask your accountant to run an estimate of your 2018 tax return using the 2017 data they just used to prepare your 2017 return or an estimate you can give them for 2018 including changes in rental assets (bought purchases and deletions.) Preparing an estimate for a C-Corp should be straight forward, but for flow-through entities it is an entirely different matter. The Tax Cuts and Jobs Act made significant changes to tax rules for individuals. Some will apply to you and some not. But there are about 30 major changes you need to consider seeing how your tax situation will change for 2018. Doing this NOW gives you about six months to do some planning to mitigate negative results. DO IT!

For those of you thinking you will just switch to a C-Corp to avoid the whole tax personal tax issue…..STOP THINKING THAT….. In most cases the total cost of doing the switch will not offset any additional tax you may pay now. And, we all know that the tax laws change regularly, and you would not want to make the costly change to a C-Corp and then have the reason you changed disappear because they changed the law again.

Back to the covenant issue.

Management should take an interest in the covenant calculations because if things are tight it may cause a change in plans.

There are normally two covenants dealers need to contend with: Fixed Charge Coverage and Maximum Total Funded Debt to EBITDA

Both calculations use the same calculated EBITDA number which is usually a trailing 12-month (TTM) calculation, which follows a formula developed by the bank for your personal situation. The point I want to make is that the TTM figure is net of special situations and other normalizing adjustments. So, you want to be certain you understand how the formula was developed and if any further changes are required.

Fixed Charge Coverage is the adjusted EBITDA for the TTM/debt service requirements for the same period. This calculation is one management wants to pay attention to because when the coverage is close to the bank’s minimum it is time to come up with a plan to improve the situation before you wind up blowing a covenant which requires a waiver to avoid a default on the loan. In short, this is a GOOD COVENANT because it has the company’s best interest to avoid cash flow problems.

The Total Funded Debt to EBITDA covenant is the banks way of stopping you from taking on more debt than you can handle. It is calculated as Total Funded Debt/Adjusted EBITDA for the TTM. It will probably fall into the 5-7 times range. While meaningful I normally don’t get too excited about this one if the Fixed Charge Coverage is within the covenant limit, BUT……THIS SITUATION COULD CHANGE DRAMATICALLY ONCE THE NEW LEASE ACCOUNTING RULES ARE REQUIRED TO BE ACCOUNTED FOR.

Even though the new lease accounting rules don’t take effect until 2019 for non-public companies it is time to start estimating where you will be should you have to capitalize all your leases and start a dialog with the bank on what they expect you to do to comply with the new rules and what their policy will be in applying the new lease rules with existing customers. For many of you it is entirely possible you will be in violation of the one or the other of these annual covenants if you add a significant number to the liability side of your balance sheet.

I suggest that dealers selling one OEM’s product get together to decide how to deal with this issue so that the accounting between them is somewhat standardized. It would also be a good exercise to find adjustments to use to improve covenant results. And finally, this meeting would also be good time to discuss how customers will treat leases related to your long-term fleets.

So, look at where you stand now in term of covenants and then plan out what you will look like after the new rules take effect. Doing this work now will also help you understand what our customers will be asking for to calculate the impact of your leases on their books.

Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail editorial@mhwmag.com to contact Garry.
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