Garry Bartecki, CFO of employee-owned Illini Hi-Reach and Material Handling Wholesaler Bottom Line monthly columnist Garry Bartecki

Risk Assessment

As you well know there are quite a few issues facing dealers for the balance of 2022 and into 2023.

  •                 We have Inflation with many factors pointing to Stagflation.
  •                 We have interest rate risk (which is scary).
  •                 We have credit risk from your OEM down to your customer level.
  •                 We have increased transportation costs.
  •                 We have pending EV interest and requirements.
  •                 We have consolidation on many equipment fronts.
  •                 We have staffing problems.
  •                 We have supply chain problems.
  •                 We have the retail sector stuck with bloated inventories.
  •                 You can add a few more.

On the positive side a recent BDO newsletter I received states that industrial real estate is staged to almost double the volume of five years ago. With many companies needing to put products closer to customers and the trend to produce more products in the US, lift truck dealers have a tremendous opportunity to add market share. Sounds good so far, but there is no free lunch because owners of these properties plan to become digitally aware looking to digitally connect systems to work together and deliver more productivity. Sounds great as long as you can participate in this digital process. If you cannot, do not expect to be at the top of the list when they need equipment. ( I suggest you sign up for those BDO emails because they contain a lot of practical material).

The next item on the list will require a strong balance sheet along with meaningful EBITDA. A year ago, you have a Fed Fund Rate of about “0” to which the bank adds, let us say, 2.5% to 3.0%. as your rate to receive working capital and Cap-X loans. When you think about this your costs are increasing, and vendors who experience a similar fate will be passing on their higher interest costs to you as well. A lose-lose situation because the reality of this situation is you incur higher interest costs without a source of revenue to offset them. You obviously will have to increase margins to cover this higher rate, but it may take a year to catch up to the cost increase, with the higher interest passed on by vendors making it even tougher to catch up.

For example, you now have a 2.5% loan. With the Fed rate changes, the base rate is now 2.5% (and will probably go higher) to which you add on the bank rate of 2.5%, with the new rate being 5%. That’s a 100% increase! To see the impact of these changes, take a look at your 2021 annual financials to see what your interest cost was. Now double it to compile what your new annual interest dollars will be.YIKES. Where is cash coming from to cover this expense?

Where you find yourself after these higher rates are executed is in front of your banker who says, “ Looks like you missed your covenants, and we will have to see what needs to be done to correct the situation.” I hate to pile on like this but ’22 is the year of the new lease accounting rules which will add lease debt to your balance sheet which could create additional covenant problems. All the more reason to take a HARD look at your balance sheet now to give you time to prepare your defense when the loan renewal comes up. Dealers with unit inventory and a rental fleet might see debt covenants as follows.


                Debt/EBITDA-Cap X.

                EBITDA/ Interest.

                EBITDA / Total Debt Service.

I am sure that a lot of you are familiar with these calculations. Hopefully, you have examples of how the bank calculates these results. If you do not have those examples, get them, and keep them handy.

Since EBITDA shows up in more of these covenant calculations make sure you have an outline for adjustments to make to the EBITDA. For example, one-time charges and personal expenditures could be used to adjust the EBITDA to a higher positive result. It will pay to study how you are accounting for revenues and expenses to insure you have the right figures in the right period. And remember the “I” in EBITDA stands for interest. Make sure you are using the correct amounts for interest expenses.

Obviously, the lease debt will increase the debt amount on the balance sheet resulting in a material adjustment if you lease a lot of equipment or have long-term contracts (not equipment related). Bankers have been saying that you do not have to worry about the lease debt, as long as you are in good standing with the bank. Get a bit out of sync and you may find that suddenly the lease debt is more important than anticipated.

One last point.

Your customers and vendors will find themselves also having problems with increasing rates. So now is the time to see how the financials of your slow players look. These rates are sure to generate a lot of Zombies (Wall St. term for a company not able to make their next bank note payments) who borrowed too much because the rates were low. Thus, the question becomes “How many Zombies are in your AR schedule?”

Is not owning a lift truck dealer fun? Most times yes. For the next eight months probably not.

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.

Author: Garry Bartecki

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