Looking forward
I don’t know about you but I find today’s financial markets quite confusing, which makes it the tougher trying to plan for the future. Quite frankly, I still suggest keeping planning strategies close to the vest because the “markets” could move either way for any number of reasons and thus impact your business either way. How quickly things change today has me shortening up the planning process into quarters, not years. I suggest that dealers should prepare a preliminary annual plan, but then spend more time on a detailed plan for next quarter, thus providing more flexibility to make changes as necessary. Not only is this quarterly process more flexible, it also forces you to take a hard look at the upcoming three months, probably a lot harder than you would have if you only have an annual plan.
As an example of what is going on, let me relate an experience I recently had with a banker representing one of the major banks financing construction and material handling equipment. This banker attended the AED convention in January and said that he was booked solid for three full days and that every person he saw was very upbeat and enthusiastic. With 25 years’ experience in the equipment finance business he said he never experienced anything like it. Taking this a step further I would suggest this same exuberance shall carry over into the material handling business if, in fact, manufacturing is brought back to this country along with upgrades being made in the distribution/warehousing business.
All in all a lot of people are expecting growth in 2017-18. That’s a good thing.
Speaking of confusing, the talk about tax changes are enough to drive you to drink. Even the most experienced tax people I work with are shaking their heads about how all of this will work. Companies will still be required to report using GAAP, but it appears for tax purposes companies will be more on a cash basis (when you pay for it you write it off and when you collect it you it record as income). Keeping that in mind in the next paragraph they say LIFO will be retained, which is hard to understand if you write off your purchases when you buy them. In other words, this is no inventory to attach LIFO to. If you think what I just covered is confusing, just think about the border or territory tax. If you bring items in from out of the country to sell in the US you pay tax on it. If you send goods out of the country you don’t pay tax on them. Many dealers may not be directly involved with international trade but what about your customers and suppliers. How will this impact your business….something to think about.
Add in talk about interest rate hikes, which are sure to come, and their impact on the dollar and we could be right back where we started since a stronger dollar will make imports cheaper and exports more expensive. Isn’t that just the opposite of the border tax impact discussed in the previous paragraph…..more to think about.
And, as I mentioned in a previous column, many companies in the equipment distribution and rental business are taking steps to extend the useful life of their assets which in turn reduces Cap X purchases and softens any interest rate hike while increasing cash flow. If you didn’t see that column you can look up last month’s column on MHW’s website and look it over. As usual, comments are appreciated.
After thinking about all these events scheduled to take place sometime in 2017, I go back to reaffirm my suggestion about adopting a quarterly planning process because as of today there are too many balls in the air to contend with to only have one plan that is probably 10 months old.
One more thing for this month.
As I was reviewing my accounting publications I came across an article titled “Figuring out transfer pricing: How to set terms of negotiation between departments.” Sounded kind of interesting even though transfer pricing usually has to do with tax planning… pushing profits to low tax environments. But in this case the discussion covered more than taxes by discussing the competing interests in the same company which if not balanced properly can have a negative impact on the company as a whole.
I don’t know about you but this certainly sounds like every lift truck dealer I know where the parts and service departments sell to the sales and rental departments.
So, what did we learn from the article:
We know that department heads are often compensated based on departmental profit.
Thus, we understand there is a conflict of interest regarding internal charges.
And if pricing agreements can’t be put in place, it is possible the results may not be good for the business as a whole.
Management has to be able to convince department heads that they can determine performance levels even if internal pricing is distorted.
Management needs to explain reasoning for distorting internal pricing and basically get “buy-in” from the department head.
Costing conflicts can be resolved by comparing the market price versus the internal price. When it comes down to labor and parts pricing it should be somewhat easy to determine the true cost and rate to use for best customers (which are basically your sales and rental departments).
When part of a department head’s compensation is based on firm-level performance there may be a greater alignment between the department head and the company.
Food for thought.
Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail [email protected] to contact Garry.
