Ready for the 2017 financial rollercoaster?
I am going to start out wishing you HAPPY HOLIDAYS AND A PROFITABLE NEW YEAR!
Thought I would supply the greetings now because we have some serious issues to discuss this month, and by the end of this column the HAPPY HOLIDAYS may hold but the PROFITABLE NEW YEAR may be suspect, especially if you ignore your management responsibilities.
Now why would I say that and spoil your holiday season? Let me tell you why:
1. The MHI forecasts for new orders expects a 13% drop in 2017, with minor increases the following two years.
2. We have unknown tax changes to be implemented in 2017.
3. Interest rates are probably going up again in 2017.
4. The new lease accounting rules will have to be planned for.
MHI forecasts
MHI’s forecasts are influenced directly by what happens with new orders. They see direct correlations related to industrial growth and equities, and inverse correlations related to a strong dollar and interest rates. (See chart #1 and #2)
You have been here before, and if you made it through the Great Recession in 2009 I guess you know what you need to do to deal with sales volatility. This time is different, however, because I don’t believe we will have the same level of recovery we had post Great Recession. If I had to guess, this will be a very slow recovery where you will have to count on your after-market departments to carry the ball so that you maintain a 100% absorption rate.
And, of course, the unit sales will be a function of your sales and marketing efforts, hopefully strong enough to allow you to maintain your current levels of sales by taking market share from competitors.
Taxes
Boy, that 15% tax rate talk for C-Corps sounds good, does it not? Almost sounds too good to be true. It may entice international companies to bring more work to US shores, but may or may not work out for the national companies (that is you.)
There is also talk to allow flow-through entities to pay the C-Corp rate on business taxable income that would normally be taxed at your personal rates on your 1040. There has to be strings attached because it would be too easy to manipulate your salary (which would be taxed at your personal rates) while the balance of taxable business income would be taxed at 15%.
We also know the GOP has their tax plan, which the last time I looked, was making changes to depreciation, personal deductions and other deductible expenses. Boy, throw all of this in your tax planning bucket and the BIG question is …..WHAT DO I DO WITH 2016 TAX PLANNING SO AS NOT TO MISS OUT ON 2017 OPPORTUNITIES? The other BIG issue is how you plan to deal with these changes on behalf of customers.
Interest rates
Interest rate hikes…..just what you needed. But there is no doubt they have no place to go but up. If they do, customers are likely to slow down purchases and be more inclined to rent, and this will be especially so if tax benefits related to equipment purchases are reduced. On the other hand, it’s not like customers were paying 1% for their equipment loans, but going from 5% to 6% is still a 20% increase. It’s time to have multiple financing sources available when you have to shop rates for customers.
Lease accounting
Last but not least we have those damn CPA’s (that would be me) sticking their nose in your business once again wanting to get your customers’ operating lease liability recorded on their balance sheets. I assure you the bigger the customer the bigger this issue will be. Another nail in the coffin for long-term rentals as we know them. This does not apply to short-term rentals, but before you get too excited, a month-to-month rental for 60-months will not get them out of the problem. Big companies get “audited” by big accounting firms who know what to look for. The customer’s main problem will be covenant requirements regarding debt/equity ratios and debt service coverage requirements.
Well, are you ready for dessert yet?
Ok managers …time to update your game plan for 2017 and beyond. I would start by digging up your playbook from 2009 or so and start there. If you are still with us I have to believe whatever you did in 2009-11 must have worked so why reinvent the wheel. Dust it off, review it, note any changes in assumptions that need to be made, throw in notes to deal with the issues above and you will be at a good starting point.
Next, I would dig out your MHEDA DiSC report to see where you stand based on your location and size. I would pay particular attention to the “sales per employee” data that is presented for the company overall as well as production metrics for each department. Could it be that we are “fat” in a few departments and could make adjustments if we need to. I would be glad to help with this review if you want an outside opinion on where you stand. Part of this ops review would entail an analysis of your digital and telematics capability that streamlines service work and helps customers customize their ownership and maintenance requirements.
The tax planning options available will be determined by where you stand tax wise going into 2017. There may be steps to take depending on whether you are a C-Corp, S-Corp, LLC or Partnership. You would have to review your entire tax picture to determine if there are benefits to be had in 2016 and/or benefit your tax position and cash flow in 2017. Obviously, there are transactions that have to be completed by the end of the year to qualify for benefits, and there are transactions completed by the end of the year that you will be able to adopt to your 2016 return as the planning dictates. If you need help with your tax situation or just need a review from an industry expert in these areas, Steve Pierson is the guy to call. He has worked with me for 25 years on all lift truck dealer issues, construction equipment dealer issues, rental company issues and leasing company issues. There is not a dealer issue he has not seen and believe me when I say he will not reinvent the wheel. He is the wheel. Have a question or issue that needs discussing, let me know. If we get numerous requests for the same issue we will put together a webinar for folks to attend and then follow up on individual issues as necessary.
interest rates and equipment financing will be what they will be, but I would have a program available that provides customers with a full range of deal options from an outright sale, to capital lease, to operating lease and to any other financial merchandising option you can offer up. Of course, these worksheets should also provide monthly payment options, tax benefits and cash flow options. It should be mandatory that every quote presented have these options available.
I will have your back on the lease accounting issue. We have some time before it is implemented but I would want to prepare a list of lease transactions that apply to the new rules, those that don’t and those that are in limbo. There is no doubt that by applying the new rules that lease expenses are brought forward to the first couple of years and then decline toward the end of the lease. This happens because an interest factor is applied to the outstanding balance as opposed to a straight-line payment that we now use for a monthly lease payment. There is no doubt there will be some creative accounting going on …and for small companies it may work, but for your larger, audited, customers the “true” obligation of the transaction is what will govern.
Last but not least, let’s deal with the anticipated sales decline issue. If dealers want to increase unit sales they will have to take market share from a competitor. Consequently, a review of the sale process and sales department is in order. Times are a changing, so if you are doing things the way you did ten years ago they probably need upgrading to improve your visibility in deals. I hear a number of dealers are upgrading their CRM systems which can be costly. I have another suggestion to make if you want to improve your deal visibility and close ratio.
Drum roll please.
For the poor man’s salesforce I suggest you contact Dave Gordon at Winsby. I have mentioned this before but I know for a fact that your customer retention, customer satisfaction, your ability to properly communicate with customers and potential customers will all improve for a fraction of the cost of a CRM system. And your sales folks will love it! [email protected] or 708-269-3499. I could not believe what they deliver for what they charge.
Steve Pierson, Dave Gordon and I will be at the Material Handling Wholesaler Midwest Conference next June in Chicago. But if you need us before then to discuss the potential sales decline, tax issues, or other dealer problems from valuations or M&A transactions, give us a call.
Take what I am telling you seriously and I forecast a profitable 2017 for you and your employees.
Now are you ready for dessert?
Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail [email protected] to contact Garry.
