Garry Bartecki headshot Garry Bartecki

The World of Dealership Finance

The World of Finance at this moment is in a state of flux and will probably continue to be through 2021.

I am preparing this column on July 27 just before the Cares and PPP program stimulus is set to expire at month-end. So far, the $600 per week stimulus has fortified consumer spending. The PPP program has done the same by keeping employees on the payroll. What happens if these stimulants go away?

There is little doubt that jobs that were available six months ago are no longer there. Consequently, a significant number of our population will still be unemployed for the remainder of 2020 and perhaps well into 2021. Add in what is happening in the rest of the world and you can see that for many industries and personal services the outlook will be frightening.

Taking this all into account, management in the material handling industry has to manage the balance sheet and cash flow, determine if results are according to plan and adjust the program as necessary to reach cash flow goals, keeping in mind that their ability to price products and services according to pre-COVID levels have and will continue to be challenged for some time to come.

In this environment both cash flow and balance sheet management top the list in terms of where company managers must spend their time. This is an interesting interaction because solving to improve either goal can have just the opposite impact on the latter. For example, when you lease equipment the lease accounting reduces your earning and thus EBITDA, and in most cases is more expensive cash wise. Buy the equipment and your EBITDA and cash flow improve but makes your Debt Service and Debt to EBITDA covenants harder to reach.  Me, I prefer to meet my covenants because banks today are not as friendly as they say they are.

Speaking of your balance sheet and cash flow, please consider your credit policies and AR collection policy keeping in mind that a historically steady customer can become a credit risk practically overnight. Waiting until month end to review AR days outstanding could reduce cash flow if a customer credit score changed at the beginning of the month and you kept providing parts and services as if no change occurred.

At our last MHW conference, a company called CREDITSAFE demonstrated how they can notify you immediately if a customer credit score has improved or deteriorated. You get a daily or weekly email highlighting which scores changed and why which is better than waiting 45 days to figure out you are not going to get paid. A very cost-effective product as well. Dave Gordon is their contact that covers both the material handling and construction equipment dealers. If you wish to stay ahead of the collection process you can reach Dave at David@dealerfinancialresources.com. Worked with Dave at AED and can assure you he knows the equipment dealer business.

Let us review our Finance World in terms of leasing, rental, and financing transactions.

LEASING

In this current environment, I prefer to outsource as much as I can to keep costs under control and personnel spending their time on customer needs and not my internal needs. And I believe this goes for you as well as your customers. For trucks, vans, and cars needed to service customers I like to explore my options with a Fleet Management Company who can provide an analysis of what equipment I need along with the services I need to operate the equipment efficiently. I do not know about you, but a company must know their fleet and have accurate data to manage the equipment in the house. Somehow that never seems to work out the way it was planned. And with many companies having a lower employee count maintenance seems to fall by the wayside.

These leases can be drafted to allow flexibility should the markets turn against your dealer activities. Current data indicates that Open-End leases are more appealing than a Closed-End lease. In any event, the FMC gets rebates for fleet transactions that lower the cost of ownership and at the same time manage the entire process to maximize uptime and expenses associated with the fleet. One-stop-shop that frees up your managers to profit from customer involvement.

While leasing, as mentioned previously, currently avoids impacting the balance sheet the new Lease Accounting Rules when enacted will cause lease transactions to become a balance sheet item. That being the case I would discuss this future development with your bank to see how they will handle this change. Many bankers say they will not include the lease accounting “debt” in their calculations, but who knows if they will stick to that promise. If covenants are tight, I would try for month to month short term rentals if you believe the bank will include the leases in the calculation.

And let us keep in mind this is the last year for Bonus Depreciation. If you can put the bonus deprecation to good use, you may want to purchase equipment or enter a capital lease that has be capitalized on the balance sheet.

Needless to say, there is some thinking and planning that goes along with lease transactions.

BANK FINANCING

Any facility providing financing to your dealership is going to spend more time doing due diligence about your business. So, management beware because while banks understand that COVID has caused depressed earning and EBITDA results, they will still expect covenants and cash flow requirements to cover debt service. You would think that a customer who has always covered debt service would get a pass for Q2 20 but do not count on it. As we mentioned previously keep debt off the books and budget and execute to cover debt service for each Q of the year.

Bank rates are good. For how long, who knows. Refinancing is certainly on the table if you can reduce debt service as part of the deal. But banks are nervous. Do your homework before you try to refinance. And make sure any equipment appraisals are in the ballpark. It would not be unusual for the bank to ask for a “second” opinion on the appraisal.

I think we can throw in OEM’s with the bank review because they also need comfort that your dealership will cover what they are owed. Expect to be asked for current credit standing inquiries. Since many customers are avoiding new equipment purchases it makes sense to carefully review new inventory and rental fleet needs before making a commitment with your OEM.

THE RENTAL MARKET

Rental is strong and getting stronger. Customers need equipment when they need it and perhaps not for a full year. Since rental is one your major revenue silos and since many customers are reeling from financial issues, I suggest you get highly creative with your rental menu. To do otherwise gives your creative competitors a chance to move your business to their company. Daily, weekly and monthly rentals. Rent to own, with and without open-ended lease components to opt out early. Rents based on hours used. Re-rent what they need that you do not have. Help them as the Fleet Management Companies do. In other words, do what you must do to keep the business and expand your offerings to make customers more efficient and profitable. Also, secure your relationship with decision-makers so that you receive notice about bids showing up from competitors.

My guess is that many current customers will avoid purchasing “New” for some time. If that is correct, then managing your rental fleet at a level to cover increased rental activity should be considered.

In the end, dealers with a customer base that allowed employees to work from home probably have not seen a big drop in sales from these customers. And those of you with a significant warehouse business are probably not hurting for business. But no matter where you stand right now dealers need to be prepared for the next financial events appearing in the remaining months of 2020 and into 2021.

Maintain your cash flow! Manage the Balance Sheet! Take into account your tax situation! Plan for more competition on pricing! Manage your credit policies!

Listen to more of this cover story with Garry and host Kevin Lawton on this month’s Cover Story Podcast.  Click here to listen.

 

Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail editorial@mhwmag.com to contact Garry

Author: Garry Bartecki

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