What comes after the retail sales crash?
December 8, 2009
Filed under Dealer Consultants
You’ve survived a generational downturn in sales. Now make sure you’re ready to take advantage of the opportunities ahead. If you’re like many dealers we know, you’ve endured the most significant challenge to your business’ survival to date. You’ve cut trusted staff, shelved long-term plans, reduced inventory and locations, and watched your balance sheet take a body blow. You’ve paid a steep price to keep your business intact while many others have been forced to liquidate. But you’ve made it.
The questions for the survivors now:
- Are you in a position to take advantage of the coming market?
- What can you do now to prepare your business for the opportunities that lie ahead?
- How do you prepare to go on the offensive?
Previous recessions tell us that there will be a significant up-turn when the current market ends. However, as a recession ends lenders will tend to gravitate to the safest investments possible. Does that category include your business?
In recreational industries, the lenders that have stayed in the game have shown their commitment. But will they be ready to grow with you when the time comes? The answer for most is a qualified “yes.” The qualification is that lenders will be interested in backing those dealers with good balance sheets, clean inventories and strong business plans.
When the market comes back, you will want to finance your re-expansion with more inventory, facilities and cash. Without financing sources, your business will be in even more danger than it is now, as your competitors will be sucking up sales and market share while you remain cut off.
So what can you do now to be ready for the market when it comes back?
Do what you can
First, manage what you can. Much of what’s going on in today’s marketplace is outside your control. Focus instead on four areas that are in your control for 2010: Take control of your inventory, learn how to read and manage your balance sheet, plan for cash flow and manage your expenses to match the level of sales the market is giving you. Now, in writing.
Lenders are aware that dealers have come through a tough time, and they expect your financial statements will not look good. Although your balance sheet today might reflect losses and inventory liquidation, you can have a great story to tell the lender if you effectively manage your inventory and are in position to be profitable in 2010 and beyond.
Take a hard look at your inventory now, and devise a plan to sell through your aged units. Generate an annual and monthly written cash flow plan. Look at your operating plan again and determine if you’ve got your expense structure dialed down to the level it needs to be for the coming year. Check your personnel expense ratios and make sure you’ve adjusted your business to the proper structural size. Look at your semi-fixed expenses and decide what can be adjusted. Review your fixed expenses and decide if you are maintaining excess capacity in vehicles or equipment. If so, convert those assets to cash rather than maintaining and insuring them.
Finally, schedule a meeting with your CPA and discuss what your year-end adjustments will be. If you use LIFO or other inventory adjustments, get involved with the calculations right now so you can determine if there are any last-minute adjustments you should make to your inventory. A small change might make a huge tax difference! Also, review your corporate structure with your CPA. Have you made loans to the corporation? Maybe this is the year to forgive them and allow that money to flow as revenue to the company (and off the liabilities section of the balance sheet). What depreciation methods are you using for taxes? Should you use a different calculation? Get involved with the accountant now, not after the fact.
Understand the key covenants required by your lender.
Dealers don’t speak bank, and bankers don’t speak dealer. We’ve heard this frustration from both sides. It usually goes something like this … You think you have a good partnership with the bank and then the new commitment letter shows up. It might as well be written in Greek. You read the first page or two, then scan the rest and sign, wanting to get back to work. Sound familiar? Well, this is not the year to scan and sign. Call your rep and ask for detailed explanation of all items on your list. Make sure you understand exactly what they’re looking for and where to find it on your statements. Find out why it’s important to them, what behaviors and results they want to see from their dealers, and determine what would need to happen in your business in order for you to meet the requirements.
Sometimes this may require you to do things that seem counterintuitive. For instance, one dealer we know recently liquidated a large amount of inventory at a substantial loss. His P&L looked terrible, but he was able to reduce his debt so substantially that his debt-to-equity ratio and cash position actually improved. The lender is happy, and the dealer is now in a great position to buy fresh inventory for the coming season (with a large weight off his shoulders).
Know where your weaknesses are and be ready to discuss them with your lender.
A dealer recently asked a great question at a 20 group meeting, “Can you sell your balance sheet and business plan with as much confidence as you sell a unit in your dealership?” If the answer is no, then you need to freshen up your balance sheet knowledge and be ready to defend it. Almost every dealer still in business is financially weaker today than they were three years ago, so it is no surprise that you’ve got some ugly stuff on your balance sheet. Your lender expects it. What they also expect from those who’d like to have their lines renewed or expanded are detailed plans of how things will improve. Take a lesson from publicly traded companies and attach notes of explanation to your financials. Explain what is happening and what you’re going to do about it. Give benchmarks to show meaningful progress in measurable time. In other words, do everything in your power to display that you are aware of the critical issues in your business and that you are taking steps to improve them.
There are two very dangerous times for businesses during a recession. You’ve survived the first one – the crash in sales volume. The second time of danger is right now. Stability is in sight, and now is the time to maintain financing in order to make the profits needed to restore the damage done to your balance sheet. Recession is followed with a resurgence of some kind. Dealers who come out of crisis management mode, accept the current reality, and start to plan for the future will be way ahead of those who don’t.