Forks in the road
Hope you noticed I used a plural for the word “Forks”. Did it on purpose because every company out there will have many decision points to consider regarding post-pandemic activity, many of them uncomfortable to discuss but in some shape or form necessary to deal with. And when you add the “forks” into the mix it seems managements time will be increasing preparing plans for ’22 and beyond using gameplans that are drastically opposed to one another.
Almost every line item on your balance sheet and income statement will be in play, with your goal to ensure adequate cash flow to cover debt service as well as operating expenses. Easier said than done under current circumstances because of all of the variables (forks) that need to be considered. And not only do you need to dive deep into your financial needs but also have to take into consideration your customer needs for the periods under consideration, because it does not make much sense to devise a game plan for 2022 and 2023 only to find that customer needs are materially different from what you plan to offer.
You are probably wondering what forks we are talking about. The inflation/deflation possibilities are the choices because you will need to decide which horse you decide to ride but also plan for both. Read on to see why.
If you guess right good for you. If you guess wrong, you have trouble. But why guess when you can be proactive getting in front of customers to see how you can help going forward. Being that most of your customers deal with large inventory investments they may need to become more efficient or cut costs to assist with debt service issues. If I had to guess a good number of customers are worried about customers coming back online and their ability to service those customers. Then they need to think about getting paid, interest rates, and wages along with cost inflation or potential deflation if they need to liquidate inventory.
You have been hearing mostly about inflation fears for the balance of the year and probably into next year. Probably true and probably short-term except for the “sticky” inflation that is tough to reverse, such as wages.
But after much reading and research, it is just as likely that deflation could precede inflation by about 15 quarters or more because of debt levels causing above-average debt service demands. The technology could also produce new products for a lower cost. In short, there is a possibility customers may have to liquidate excess inventory to generate cash to pay vendors and bankers and at the same time find lower-cost products coming online to replace what they sell.
History tells us that debt bubbles (as we are in now) produce inflation increases as a lagging indicator because debt issues slow growth and cause prices to decrease because companies have to reduce prices to meet debt service needs. The lag is about 15 quarters or four years. So here is one of the forks you need to deal with. Are you planning for an extensive high inflationary period starting in 2022 and what that would mean in terms of employee needs, inventory needs, marketing, and sales upgrades as well as any related costs to execute such a program?
Or will you plan based on the other side of the coin with deflation more prevalent because of businesses dealing with debt issues producing a need to unload inventory and assets as well as costs to produce positive cash flow? If a majority of your customers find themselves in this debt bubble scenario dealers could wind up facing lower revenues, excess inventories to finance, and bank covenants that are going to be hard to meet.
Had you picked the low inflation plan and assume customers will be in a similar situation most of your offerings to major customers would be to make them more efficient, help them sell off used material handling equipment, and assist on cost reduction where you can.
When you stop to think about it there are so many financial scenarios to consider regarding 22 and 23 that you should probably consider quarterly plans for both situations; higher than normal inflation levels for some time to come; and another pushing out the higher inflation out four years taking into account cash flow and debt service issues, customer bankruptcies, excess inventory levels, AR collection problems, and lower rental activity to name a few concerns.
Some folks are suggesting we head back to a ZERO-BASED budgeting approach as a middle-of-the-road approach to start with. Not a bad idea and with the gig society out there the ability to cut payroll costs and at the same time pick up some expertise to assist with the budget process is there for the taking.
In the end for every fork, you decide to go down there will be other forks to consider before we get back to normal, whatever that may be. A conservative approach seems to be more risk-averse. But if you have another plan on your shelf to apply to a more robust inflation cycle you can operate with lower risk until the time comes to change the game direction.
All things considered, talking to your customers should be #1 on your list before making any final decisions.
About the Columnist:
Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail firstname.lastname@example.org to contact Garry.