August 2014

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On the Numbers August 2014 | Construction Equipment Distribution | www.cedmag.com | 53 Your balance sheet is the part of your financials you probably don't spend a lot of time on. But considering that our industry is an asset-based business, you might need to figure out what is happening on the left- hand side (asset) of the balance sheet, because what it is telling us has a major impact on the value (net cash proceeds) of the business. If you are like most C-level executives, your first concern on a daily, weekly and monthly basis is the revenue, followed by cost of revenue, followed by the balance of G&A expenses. You then get to the end of the month and, from what I see in terms of responses for the annual CODB Survey, there is a big disconnect when it comes to closing the books and delivering the monthly financials to management. You would be amazed how long it takes to get that survey completed. You would expect in this day and age to have the books closed and financials delivered by at least the 15th of the following month. You would expect that, but in reality we don't receive the bulk of the responses until April, some 90-plus days after the year-end. Based on my experience, there are only two or three reasons the state- ments get held up: One is reconciling balance sheet accounts, and two is costing out work orders. With the industry-specific systems currently available today, this situation is 100 percent fixable if you pair that system with an internal update of systems and procedures to maximize the technology. When set up properly, there is a reduction of paper, a reduction of clerical involvement, a reduction in costing of work orders, faster invoice processing (both ways) an increase in customer communication through portals, and more benchmarking data to assist management with review and planning activities. If you check out the 2014 CODB Report, you will see how High-Profit Dealers (HPDs) turn over their assets faster, have a Return on Assets three times higher than the Typical Dealer, and deliver a Return on Equity 100 percent higher than the Typical Dealer. Upon further inspection, it looks like HPDs use fewer assets, turn them faster, have fewer employees, collect faster, and carry less debt. A review of the Profit Planning Model indicates that the fewer assets you use to drive returns the higher the returns will be. Makes sense. Now how do we reduce our assets? We reduce assets by asking C-level management to review the balance sheet and major supporting docs to see where asset levels need to be reduced or put back into revenue- producing status. What I do is: Get a daily cash report that lists yesterday's receipts and contains a list of all large payments due the next week. Look over AR at least monthly. We have a no billing adjustments policy and ask that billing be correct when it goes out. We have a strong credit collection person who deter- mines who gets credit and who has to pay by credit card if they want to do business with us. Override is possible by the CFO or COO, but it does not happen often. New and used equipment should be recorded correctly the first time and when it hits the floor. There should be minimum wait to book work orders. Review parts inventory and take a stroll through the parts department. If you see a lot of stuff lying all over the place you have a problem. I suggest parts accounts get balanced some time during the month to avoid delay at month-end. Rental fleet stats need review, especially Time Utilization (TU). With a good number of dealers concentrat- ing on RPO type rentals, TU should be high (80 percent or better). Hard down units should not be on the list without a plan to get them back as Rent-Ready. Hard down units get fixed or sold, because if not monitored closely they will kill your rental perfor- mance and ROA stats. While you are at it, check tech time and parts being charged to the Rental Department. Work in process will eat up your time and cash flow and must be turned ASAP. Look at the detail, and if it's in there more than 30 days get it resolved today. Balance sheet controls avoid write downs, credits, obsolete parts and units, delinquent time and parts posting, all of which will increase cash flow, reduce financing needs and have your balance sheet ready for ownership transition. B.S. controls will also allow you to close your books much faster. Clean Up The B.S. It's not your marketing materials or sales presentations that need attention, but the company balance sheet! BY GARRY BARTECKI GARRY BARTECKI (gbartecki@ aednet.org) is founder of Dealer-Rental Success LLC, is a financial consultant to the equipment industry. He can be reached at 708-347-9109.

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