Garry Bartecki Balance sheet Part 2
There is no doubt that Balance Sheet Management needs to be a top priority for Dealer Management. Dealers have a lot of money tied up in the Balance Sheet and with current economic and industry dynamics changing it will be imperative that Dealers be able to convert Balance Sheet Assets into CASH. Sounds like another MTM conversation but it is not.
I have been doing my normal economic daily review which entails about 100 email sources plus hours listening to CNBC and Bloomberg to try and anticipate future activities that will impact the equipment business in terms of material handling equipment as well as construction equipment.
And as of April 19, 2023, I am taking a stand that:
- Rates will remain higher and last longer.
- Inflation factors considered by the Fed are slowing but the remaining factors the Fed has no control over are sticking.
- The recession will happen if we are not in one already,
- Banks will be tough to deal with for the foreseeable future.
- The EV conversion is moving much faster than anticipated.
- Any customers with any connection to the auto industry can expect major changes in their company activities.
- OEMs, Dealers, and Customers will probably change the way they do business because they have to.
- Most items on your Balance Sheet will probably be impacted by the above.
Your homework assignment for this evening is to figure out what your Balance Sheet will look like a year from now (especially the cash account).
A typical deal Balance Sheet would look like this:
On the ASSET SIDE
- 2% Cash
- 28% AR
- 28% Inventory
- 40% Fleet and Fixed Assets
On the LIABILITY & EQUITY SIDE
- 11% AP
- 17% NP -current
- 7% Other Current Lia
- 25% Long Term Lia
- 38% Equity
So, what do you think? How will the changes discussed above positively or negatively impact your balance sheet, understanding that changes in the Balance Sheet can leave you with either a higher cash balance or a lower cash balance? Hey, maybe we should turn this into a game and see who comes out with the biggest cash balance. The company with the largest cash amount will be featured in my Cover Story for the September issue. Just send me your starting Balance Sheet and a Balance Sheet a year later and we will assign a code number to it to keep it confidential. Dean even said he will give a full-page ad to the winner. Please email the two balance sheets above to me by July 7th. Email them to [email protected].
I guess the first thing I would do is compile a couple of revenue stream projections covering current lines of business as well as what you would expect from changes your OEMs will make and how those new items will price out and how will they compare maintenance wise with what you are selling now. And I guess you would want to include any new products or service lines you may add to support customers and their current needs. Don’t forget to factor in inflation as well as new cost line items needed to support new business.
Next, I would get a list of my top 50 customers and determine if they are “auto” related in any way, shape, or form. I guess any company with EV exposure also falls into this category. My fear would be that they will no longer need the number of units owned or rented. Finding this out sooner rather than later allows you to plan to replace “lost” business while at the same time helping them downsize their fleet by selling off the units for them.
My biggest fear would be the ultimate value and use of what you have hiding in your parts inventory and used equipment inventory. This is usually a scary scenario. What is interesting is the value can probably increase as supplies disappear, but at some point, sink like a rock as demand disappears. A timing issue for sure. Me, I would sell off what I could now as prices are elevated and convert the assets into cash.
The goal here would be to get rid of slow-moving or sure-to-be slow-moving inventory and units to make room for replacement units and related maintenance items.
You have to be a little careful here because your Assets are supporting those loans you have on the books in terms of an operating line and equipment purchase long-term notes. Sell off too much and the bank will want a piece to put their ratios back in order.
My guess is that new unit revenues will increase for some time but that support revenues will decline as new units become more efficient and thus require less maintenance. I also expect rental revenues to increase but with some new rental scenarios coming into being. And let’s not forget that there are OEMs now planning to sell direct, which puts you in the service and maintenance business, which may not be a bad idea.
In the end, however, whatever plan you come up with needs to pay off related debt before you can move on to another business plan.
What we are discussing here is not easy to get your hands around. I would suggest that conversations with all OEMs are in order to see what they have in mind, especially for your region. Who knows, this may also be a good time to add other companies into your fold if their management is not ready to deal with this new business environment.
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.
