Mine is telling me “The stock market is not the economy.” You have heard this many times recently and it is very true. Just because the market is on a high as I write this is by no means a predictor of the economy. What it means is we have been adding money to the economy, with little or no interest income return available, thus pushing these funds into the market. If interest rates came back to 5% I suspect you would see a significant decrease in market volume.
The point here is not to drink the market kool-aid when planning for 2013 and beyond. There is still uncertainty in terms of taxes, health care, inflation, deflation, interest rates and so on. Enough uncertainty to hold back investments, acquisitions, rental fleet additions…..unless you feel more likely than not that you will have a positive outcome. That’s better than a 50% chance.….are you that confident you can hit that goal?
For example, I have been analyzing rental fleet additions for a company supplying equipment to the construction industry. Many rental companies downsized their rental fleets for cash flow purposes and now find if they want to increase rental income they have to increase time utilization, increase rental rates and add units to the fleet. Sounds easy. But when you check with customers they still don’t have a strong handle for work they will be doing in 2013-14 and are still used to getting bargain basement rental rates. These customers won’t think kindly upon your company if you raise rental rates because you bought new units at higher prices. Bottom line is I can’t make the required ROI using the new equipment prices and consequently will not make any purchases of new equipment. If I can find used units at a price that will allow a reasonable ROI I may buy those. If I can’t, I will concentrate on improving both time and dollar utilization by increasing my sales velocity and getting access to more business opportunities. No matter what, I am not going to jeopardize my cash reserves or cash flow.
You can apply the same thinking to taxes and healthcare. Right now nobody knows what’s going to transpire before the end of the year, and even if we did, the changes agreed to will probably be the tip of the iceberg with the remaining changes coming in 2013. All you know is these expenses are going up, up, up, which forces business owners to further keep their cash balances close to the vest. On the tax front we are talking payroll taxes and income taxes, both personal and corporate including federal, state and local taxes. How much are yours going up?
As you all know there are taxes charged on every expenditure you make. Add in the fact that most states are broke and you can expect increases in local taxes, sales taxes and property taxes. Someone has to pay for those pensions. Guess who.
On the healthcare front, I work with some real pros who understand the new law as well as anybody. When I ask them what this is going to cost me going forward they don’t know. All they can say is they expect costs to increase significantly. I recently received examples of individual polices and for a family of four with two kids in school and an annual income in the $90,000 range, an annual family insurance policy could cost in the $24,000 range. That’s going to work…..27% of the gross income before taxes are taken out!
Needless to say, CEO’s, CFO’s and dealer sales managers are going to be making some important decisions on how to handle 2013-14. It just can’t be “Let’s kick up the sales line by 7%” and leave it at that. Big mistake and the same one Congress keeps making, worrying only about the top line and not making adjustments for expenses.
Considering that the US economy is driven by consumer spending and the payroll tax repeal will cost every wage earner $2000 at a time when there is not a lot of discretionary income available is going to be a problem. Add in the negative effect on spending by further taxing the upper 2% (which control a large % of consumer spending) and you add to the problem. When you also throw in any spending cuts you have to walk away thinking consumer spending in going down.
I guess the point here is to have a serious plan of attack for 2013-14 taking into account your expenses as well as customer expectations. I suggest you talk to your top customers to see what they are planning and start there.
And don’t forget to consider that gut feeling you have.
Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail [email protected] to contact Garry.
