Are you as sick and tired of listening to the financial and business gurus pontificate about the economy, interest rates, inflation and the price oil and the need to go to electric vehicles (EV) as I am? It is mind boggling, making it that much tougher for business management to plan revenues, costs, profits (we hope) and cash flow. In case you didn’t get it: YOU are probably the one that is required to provide direction and guidance about the future of your company.
Since planning for the future will be tough this year, I thought I would run through some of the basics you will need to consider regarding the balance of 2023 and the outlook for the year 2024.
First, it is the POSITIVE CASH FLOW you are planning for. Budgets and net income are nice to have around, but do not provide proof of producing positive cash flow. You understand, of course, that you can “sell” yourself into bankruptcy, where you put yourself into a situation where you do not collect enough to cover your bill payments in a timely fashion. Planning for cash flow will keep you out of that situation.
How about we discuss how to budget for expenses now that we hear that inflation is slowing down. As you know, inflation forces prices for goods and services higher. During the past couple of years, prices have gotten quite a bit higher. Getting the inflation rate down to 2% does not necessarily mean prices go back to what they were pre-pandemic. They will stay where they are at and “normalize” at this new, higher priced standard of living. This, of course, means your cash flow budget needs to use these higher prices for costing out your work.
This should not surprise you, but OEMs and other sellers of goods and services like the higher prices they have been getting and are reluctant to reduce prices until they absolutely need to. Those prices will not come down until market conditions force them to do so.
One possible positive result caused by the inflation is the impact it is having on Americans wanting to retire. Higher costs are causing 25% of retirement-eligible workers to delay their retirement to build up their retirement funds. Could this provide an opportunity for contractors looking for additional help (who isn’t)? Putting together some flexible schedules may convince those trying to put some serious dollars away to work for your company.
I always preach to take care of your balance sheet, to maintain adequate cash flows by avoiding debts and fixed obligations. A review of the International Monetary Fund’s Assessing Reserve Adequacy (ARA) metrics indicates that the Penetration Index is heading upward close to 60%, which means that of the equipment in the field in the U.S., 60% of it is rented and scheduled to climb even higher. In Europe, it is 80%. What this means, of course, is that rental companies are bearing both the cost to own and operate the units that make up the 60% ratio. They have the monthly nut to cover, and the user only pays when they use it. And at 9% interest rates or so, along with an unsteady economic forecast, contractors really want to stay away from any new fixed-cost obligations. Doing so will make your bankers happy.
As far as the rental equipment industry goes, there really is a lot of information out there to help you manage rental costs. Right now, I am looking at an Equipment Watch Rental Update for Q1 2023. There are schedules in this report covering 301 types of equipment, with 1.7 million rates collected from 506 rental companies. The report discloses daily, weekly and monthly rates for both small to medium-sized equipment and large equipment. The historical data included provides the percentage change from the prior year. The report also includes a method to adjust the base data for regional variance. If you are not on the Equipment Watch mailing list, get on it. And if you do own a fleet, Equipment Watch can provide data to inform you how many billing hours will be required to support ownership of a unit.
Another issue I am sick of concerns the EVs we are getting pushed down our throats. Because of the costs and high borrowing rates, and potential lack of usability, buying an EV product is not high on my to do list. All you have to do is listen to automotive-industry EV woes that have materialized even after spending billions to bring EV units to market.
Since we are discussing financing, please keep in mind that the banks are not out of the woods yet and it is getting harder to obtain loans at a “reasonable rate” with related covenants you can work with. No matter how you look at this, it is in your best interest to defer additional debt and fixed cost obligations at this time.
The bottom line here is that our economic situation is far from settled, requiring contractors to take steps to produce positive cash flow first and foremost. Start out with your Generally Accepted Accounting Principles (GAAP) internal statements and convert them to a cash flow statement, which should be reviewed as often as possible to stay ahead of the game. The next step is to run the operation on a FREE CASHFLOW basis, which will assist with making equipment purchase decisions, as well as provide results that will maximize the value of your company.
