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FALL LITERATURE SHOWCASE 2012 It's Coming, Are You Ready—Dollar Wise? A liquidity checklist BY MA T TH EW IDE , MANAGIN G DIRECTOR OF ANG US ADV I SOR Y & F INANCE A S YOU READ THIS, I'M SURE ACTIVITY IN YOUR COMPANY is picking up to begin deliveries, get cleanings done and generally preparing for the coming winter. From the financial side of the house, preparations also need to be made. There are many items to prepare for on the financial front, but at this time on the calendar the most critical is ensuring your company has the liquidity to purchase and deliver product to your customers. Since time is short this time of year, I have prepared a quick checklist that all dealers should go through. These check points will help you assess your liquidity position and identify items that need to be addressed before the heating season goes into full swing. DEVELOPMENTS OVER THE SUMMER IMPACTING LIQUIDITY The most common development I have observed this summer impacting liquidity is that due to last year's extremely warm winter customer credit balances this spring were unusually large. When the budget and pre-buy programs that went out over the summer and fall were adjusted to reflect these larger than normal credit balances, the resulting net cash collected was materially reduced. I have seen cash collections decline by 1/3 up to ½ from the amounts dealers usually collect. The result of these lower collec- tions has put many dealers in a position with less cash than they normally have at the beginning of the season. This will impact liquidity and have to be planned for. If you are fortunate to not be experiencing the reduced collections, going through the check- list is still a very good idea. THE CHECKLIST Supplier Trade Terms – Know now the terms you have from your supplier. How much is your total trade line? When are payments due? When do I have to pay in order to get a prompt pay discount? There are two key points to remember about trade terms 1. that impact liquidity. The first is the payment term is more important than the total amount of credit given. An exam- ple is that a supplier may grant you an increase in your trade line, but you still have to pay within 10 days via EFT. So even though your supplier has increased the amount 2 3. FALL LITERATURE SHOWCASE 2012 | FUEL OIL NEWS | www.fueloilnews.com of credit they are giving you, the "real" amount is going to be determined by how much product is outstanding 10 days after lifting. In many cases this amount is below the expanded limit on your trade. The second is that not paying fast enough to take advantage of prompt pay discounts is more expensive than using your line of credit from the bank. At today's historically low interest rates, it's much less expensive to obtain liquidity from the bank than from your supplier by not taking advantage of the prompt pay discount and stretching payments. I know that it may be easier to work with your supplier but going through the process with the bank to get an appropriate line of credit will be worth it – dollar wise. You need to determine the maximum amount you can owe your supplier while still taking advantage of a prompt pay discount. 2. Cash On Hand From Pre-Buy – I discussed an important development regarding cash collections, now we have to address the practical impact. Do a quick calculation taking the number of pre-buy gallons sold and multiply by your weighted average per gallon cost supporting the pre-buy gallons. This will give you the total cost to supply your pre-buy customers. Subtract the amount of cash you have retained from your pre-buy sales from the total costs required to supply the pre-buy customers. If the resulting number from this calculation is positive, then there is a high probability that this number represents the amount of additional liquidity needed for the upcom- ing heating season. For example, if you have always been able to take all the customer pre-buy money and put it in the bank using it to pay for the pre-buy oil when delivered but this year, for the reasons noted above, you are short. The amount you are short may indicate the amount of an increase needed to your line of credit. Go To Your Bank To Get/Adjust & Renew Your Line of Credit – Now is the time to make sure your line of credit