Sometimes problems = opportunities
As you well know, every industry goes through a kind of repetitive cycle to the point where management knows how to mitigate the negatives and come out the other side of the dip right side up. And, I am continuously amazed how highly leveraged dealers such as yours manage your way through the dips which provide lower sale numbers and related cost cutting measures. I guess if you experience these cycles long enough you learn how to anticipate the cycle along with steps to take to keep the ship afloat.
But since the last major recession in 2008-09 the landscape appears to be different. Some of the financial gurus are saying we have moved from a business cycle to a credit cycle and that the abundance of credit and loose credit policies is what is going to cause the next dip. But, if that is the case, are the indicators that you usually use going to be “the indicators” or will they now be false indicators which could leave you over confident and carrying a higher risk quotient.
After all ….what is there to worry about. Interest rates are low, inflation manageable, public company profits are high, financing is readily available, new tax laws encourages capital spending and business is great.
Sounds good, does it not. 2017 was a good year and you are expecting 2018 to be much of the same. I can’t imagine what you could possible add to the management meeting agenda other than a shortage of techs and long lead times for equipment. Is there anything to discuss along the lines of preparing for the cycle? Before you answer that, consider what I mentioned previously about this not being a typical business cycle but perhaps a credit cycle you have to deal with. If that is the case…does it change your thoughts about a credit generated recession and how it will impact your business?
With a credit cycle, the gurus are saying the business borrowed too much because they could and low interest rates made it comfortable. Add customers into the equation with a much higher subprime portion of total debt and sooner or later someone is going to say I can’t make these payments and drop the keys off at your front desk. From what I read once a few big defaults occur because falling sales deplete cash flow to the point where the debt cannot be serviced, a demand to offload debt will be created, which will decrease asset values because everyone is dumping everything they can to generate cash flow to pay the bills. I do recall 2009 when I was asked to sell off my inventory and rental fleet to generate funds for the banks. I am sure you remember as well.
What started me on this topic this month was a paper I read concerning GM and how they borrowed to pay bills because they didn’t earn enough via cash flow from operations. And, a big part of their problem seems to be the net cost of repurchasing leased vehicles. Then I connected the dots to include long-term lift truck leases and any related obligations that a dealer or OEM face to cover shortfalls in actual values versus the residual values used in the deals. From what I hear there is concern regarding the numbers of units coming off lease that were initially leased post-recession.
So, in terms of this month’s topic, retired lease units may represent the problem…..costs you didn’t anticipate which could cause a decrease in business. A problem? For sure, if you let it be.
But how about you covert the problem into an opportunity that generates above average returns. It will take a few bucks to get it done but the returns justify the program if you are positive you have the means to make it work.
We are talking about buying some of those retired rental units from the OEM at an attractive price, go through the unit and replace what needs replacing, put a reasonable paint job on the unit and either add it to your rental fleet (and get an additional 5-8 years out of the unit) or sell the unit as a refurbished unit with at least a one-year warranty and an optional extended warranty for the customer to purchase if they so desire.
OEM’s may also find this program attractive especially if you buy parts from them to recondition the units.
The trick will be to find a lender that will accept the fact that your work has extended the useful life of the unit and to finance it accordingly. If you prepare a complete file on the work you did on the unit that will help a lot.
This type of refurbished equipment is being sold by OEM’s in the construction equipment business. They have zero time on the engines and you get a new plate on the unit certifying the rework and date it reentered the system. Banks are financing them and dealers and rental companies are selling them or adding them to their rental fleets.
Play with the numbers…they work. Capitalize the rework repairs following the capitalization policy you have for tax purposes. Talk to your bankers or leasing companies to see what they need to work with you on such a program. Tell your accountant you are going to buy used units and refurbish them to add 5-8 years to the useful life and will be depreciating the costs over a 4-5 year period.
The numbers should provide great ROI on short-term or long-term rental units. Sales margins should be way above average as well. In summary, the more of this you do, the higher your profits, ROA, and ROI; and cash flow improves.
Questions? Let me know.
Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail [email protected] to contact Garry.
