Issue link: http://read.dmtmag.com/i/221076
On the Numbers and Cash Flow Expect the usual cost increases – but also weigh the threats, then aim carefully. BY GARRY BARTECKI Here we are again at the end of another year, probably thinking "What the heck changed this year that made me richer and my company more valuable?" I expect the answers to fall into basically two categories: 1. We are close to the energy fields and doing great. 2. Not much. That is basically what I was hearing at the October CFO Conference; dealers and rental companies in the energy sectors were renting at standard rates, selling parts and service, while having trouble finding techs and sales personnel. Some folks have it rough. On the other side of the street are the dealers whose business moved up a little but is still lacking that steady demand for equipment and rentals that would cause them to hire more people. I would also guess we are in for more of the same, except for cost increases for personnel (salary maybe, and health insurance), insurance, income taxes, inventory cost, regulation costs, interest cost (maybe) and so on. In short, we can expect the "normal" annual cost increases. On the revenue side, we have a different story. Dealers in Category 1 don't give a rip and will pass the price increases on, and then some, to their energy sector customers. Category 2 dealers, on the other hand, can expect a profit squeeze both in gross margin line and the pretax profit line. If you're in the latter group, how do you plan to manage cash flow and profits for 2014? The revenue line is our sore point, because projects are still hard to find, and if you find one you are in a very competitive bidding process. In other words, the revenue line may or may Strategic risk not increase. Cost of sale compoFinancial risk nents, however, will increase due to I can see specific topics where union contract increases, employee the risks are similar for both dealers benefit cost, and just general vendor and contractors. price increases. When it comes to specific risks that So, your gross profit margin will could damage hiring, the economy, decrease with less profit available health care costs and energy pricing to cover selling and administration seem to lead the pack. expenses. And, of course, any increases Events that could lead to hiring are: encountered in the admin area further reduce pre-tax profit, even if you hit the the economy, longer backlogs of work, same revenue level that you had in 2013. and government investments. Growth strategies for contractors So now what? are: expansion of market, new market1.) Revenues have to increase ing efforts, and employee upgrades. through additional work or price No matter how you look at this report increases. you can parallel the findings on the 2.) Or, expenses have to be cut to construction side with the dealer side. offset cost increases. Most of the executives graded them3.) And then you generate the same selves pretty well when asked how they 2013 profit dollars – or maybe even were doing with risk management. But more dollars than you did in 2013. when questioned further, the results Bottom line: Dealers in Category 2 proved they were not as plugged in have to find ways to improve profits and cash flow while managing the risks with the issues as they thought. For construction specifically there seems associated with those activities. to be a lack of understanding about What risks? the sources of risk and how to mitigate Forbes recently collaborated with them. How do you feel you would Zurich of North America to help busicome out on a similar test? nesses better understand the risks they face and how to mitigate them. Four There is no doubt the world is hundred executives were interviewed getting more complex, especially in the from the banking, real estate, healthU.S. where regulation and government care and construction industries. After "assistance" seems to do more harm reading this a few times I believe the than good. report makes management aware of Category 2 members have a lot to the fact that business risks are more consider regarding 2014 especially if plentiful, complex and interconnected they are planning to grow the business than ever before, and require an under- to increase profits and cash flow. If standing of what they are, when they these are your plans, please take the require attention, and how to deal with time to analyze your risk profile. In short, them for the benefit of the company. take careful aim before you shoot. Construction executives, consider the following risks in order of GARRY BARTECKI (gbartecki@ aednet.org) is AED's vice president importance: of Finance. Operational risk December 2013 | Construction Equipment Distribution | www.cedmag.com | 61