Garry Bartecki COVID-19 Pandemic vs. Lift Truck Industry
Novel Coronavirus COVID-19—Demand Shock—Supply Shock—Shutdowns—Restrictions—Employee concerns—Unknowns versus Lift Truck Industry
This does not look like a fair fight. Seven against one. All eating away at your cash flow which is the lifeblood of any business.
If this fight is short-term, say 60-90 days, most of you can figure out how to manage expenses and cash flow to survive. If longer, 180 days or longer, some will fall by the wayside. Add in the extended impact where the economy slows down into recession or depression and your ability to restore lost profits will get pushed out like it was post-2009.
Thinking back to 2009-10 I have said and believe that the lift truck industry and its dealers did a hell of a job staying afloat. What is even more amazing is that you did this owning highly leveraged businesses. Performance groups, MHEDA programs, and OEMs, along with strong dealer management took steps to lower break-even sales levels, adjust expenses and increase absorption.
You made it through the last crash, but this 2020 event could be worse than what you experienced ten years ago. In 2009 and 2010 there was a credit crisis. This year there are 7 enemies to deal with along with unknown factors that are sure to pop up when least expected.
To me, COVID-19 is the greatest unknown with the highest disruption factor. If one employee tests “positive” sales and cash flow could be halted at the branch in question. If you only have one location, you may find yourself in the economic fight of your life.
Rest assured that “working from home” is here to stay and should be adopted until further notice. Stop and think who and what you need at the “store”. Most clerical and accounting personnel can probably work from home if you decide to have their data available in the cloud. A laptop or desktop work computer along with a printer, set up to get files from work, will do the job. The cloud updates individual files and general files daily. There may be a small Cap-x cost, but nothing major. Accounting, payroll, collections, AP processing, banking, and reporting can all be accomplished with a work from home program. I used one tech to set up computers and printers to work from home. It did not take much time at all.
Being that COVID-19 is a major threat to your business a What-if plan should be in place. How you remain in business is the question. How you service customers is key. Communication with your OEM should result in a back-up plan to sell service, parts, and rental. Using sister dealers in your area may be the answer. And don’t forget the union contracts you are obligated for. They can also assist with a plan for the time you are off the grid.
Adding to this financial dilemma is both a DEMAND AND SUPPLY SHOCK, which seldom appear simultaneously. Both SHOCKS are directly related to the number of manufactured goods we buy from China. COVID-19 caused China to shut down production and thus reduced supply which resulted in shortages and thus price increases. The DEMAND SHOCK. But now that China is in recovery mode and is ramping up exports, it appears that the rest of the world is slowing down and thus not interested in buying the goods currently being produced by China. Thus, the Supply Shock. So, we now have companies in trouble on both sides of the world unable to maintain normal business cycles. Hopefully, the Feds plan to provide liquidity can stem the impact of a slowing economy sooner rather than later.
After this episode, you may see a more robust “BUY AMERICA” trend which could spark a movement to bring manufacturing jobs back to the US. Last I looked at the spread between manufacturing in China vs the US is narrowing quite a bit. It may be time for the Feds to assist in some way to stimulate this movement.
As far as the SHOCKS are concerned dealers should determine that they have adequate parts inventory to maintain rental units and customer repairs. If not, stock up if you can. And if there are bloated inventories sitting in China make sure to look for lower prices compared to what you paid six or eight months ago.
The remaining enemies need consideration as well because any one of them can cause either a shutdown or a significant reduction in sales. In either case, even if additional unknowns pop up, cash flow will be the major issue. It always is and always will be.
Not being able to nail down the potential period of disruption I suggest we use a six-month window to measure cash flow requirements. That is a safe period to consider and if it is only three months, so be it because it will still be a good exercise to go through.
Keep in mind that this is not your usual slowdown and that everything is on the table in terms of expense reductions and payment requirements. EVERYTHING.
Use sensitivity analysis starting with your original 2020 budget and then reduce sales for each profit center by 10% and another 10% and another 10% until you reach 50% of the original budget sales number. At each step, you will determine how much of your variable expenses can be reduced and what semi-fixed costs can be adjusted and what the fixed costs are. If you remember we discussed lowering the break-even sales level a couple of issues ago and that discussion will play itself out during this exercise.
And let’s keep in mind that that 10 % reduction in sales will not apply 100% in this exercise because long-term rentals with maintenance should not follow the reduction plan we are using.
Also, note that note payments and leases are fixed unless you take steps to change that during this disruption period.
So, after each 10 % step is calculated you need to adjust for the long-term contracts, which include note payments, as cash outflows when determining cash flow at these revised income numbers.
Once you get into a negative position steps to reach break-even must be considered and noted. We have Cost of Sales numbers to consider, Personnel costs to consider, Occupancy costs to consider, G&A costs to consider, plus interest costs and on the revenue side transactions available such as used equipment sales that could reduce the shortage. I included interest expense as a cost to be deferred because you will probably have to ask your bank and floor plan provider to suspend both interest and principal payments for the disruption period. The same goes for operating leases. Ask the lessors to tag it on to the end of the contract.
Unfortunately, probably your biggest variable cost will be payroll related. You can lay people off for a fixed term. You can terminate those who were on the bubble to begin with. You can initiate a percentage pay cut for all employees for a fixed period. Those with unions have additional problems to deal with. But under these unique circumstances’ unions may be interested in some type of program so that you can maintain your technical help which is almost impossible to replace.
Before any layoff program begins it would be prudent to discuss Federal and State compliance rules regarding these types of actions.
The revenue silos that provide the bulk of the absorption factor are the key silos to worry about. Parts. Service. Rental. Trying to keep these revenue sources productive is where you want to spend your time. Up the advertising spend. Offer special programs. Discount and never lose a deal if you have the hours available to do the work. Also, consider ways to replace equipment by using flexible payment terms based on hours used instead of a fixed rental rate.
You can also expect your customers to ask for concessions. Find a way to accommodate them, maybe in return for an extension of the contract. Make it a win-win if you can.
Concessions may also come in the form of AR collections. Customers may ask for an extension of time to pay or for a reduction in the invoice amount to be paid. The key here is to know your customers and be prepared to work with customers you need to keep. Hell, make it a twelve-month payment plan if you must.
The remaining unknowns pertain to Fed assistance available and how employees will deal with the potential of becoming infected with COVID-19. Keep them informed. Sanitize the facilities daily. Investigate a work from home program. Keep them up to speed on any government program available to compensate them for losing their paycheck. Ensure that they understand you have their safety and financial security at the top of your list.
We are all this together. “This” however deals not with one issue but several issues we have never had to consider before. In the past, it was one issue that caused a recession. This time it is local, international and medical all related to a pandemic, plus demand and supply issues created by the pandemic. In addition, the required steps required to reverse the spread of the virus calls for shutting down major portions of the economy here and around the world. This is not a pretty picture.
It is time to gather up the management team to discover the actions required to come out of this disruption right side up, able to restore your sales activities to levels that allow you to recover lost profits and cash flow.
REMEMBER, EVERYTHING IS ON THE TABLE
Those of you in performance groups should hold digital discussions to get ideas about cost reduction and revenue retention. OEM’s should assist with this process. There should be a “leader” for each group assigned to learning the steps to obtaining Government assistance. Working together will make this easier for everyone.
As I mentioned previously this episode generates potential long-term changes. Both business and consumer behavior changes will be a requirement for health and wellness awareness, expansion of experiential culture, greater use of digitalization and virtualization, risk mitigation practices, waste management, climate control, infrastructure investments, new capital expenditures, and productivity initiatives.
I can only hope and pray that you will NOT have to make the tough choices outlined above. If we can get through this in 90 days that would be great. But plan for 180 days to make sure you are covered.
Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail [email protected] to contact Garry.
