Upturn or Recession?
Upturn or Recession?
Guest writers Steve Clegg and Debbie Frakes are writing for us this week about the ways in which our accurate forecasts can help us plan for real growth in “Upturn or Recession?”
The equipment industry is cyclical and seasonal. Many dealerships react to events by looking backward at accounting financial statements, explaining why they are victims of current market conditions. But the most successful dealerships always look forward by forecasting and planning for the future. As a result, they can take advantage of both upturns and downturns.
There are effective Artificial Intelligence (AI) models that can be used to forecast and create a business plan, based on these forecasts. During an upturn, you can expect shortages of parts, equipment, and employees, as we have recently experienced. The best approach to maximizing profits is to focus on the customers and industries with the highest retention rates where the best service can be provided to generate a healthy gross margin and a high return on capital. This process builds cash and liquidity and strengthens the balance sheet in anticipation of opportunities during a downturn.
It is important not to chase the upturn, although OEMs and banks are often eager to encourage that approach to accelerate their own growth. A sustainable growth rate for your own facilities, employees, balance sheet, and customer retention, however, places limits on rapid growth. Most dealers cannot sustain a growth rate in customers and transactions greater than 10% to 15% per year, regardless of the opportunities. The requirements for new customers, employees, systems, facilities, training, and capital are beyond their internal capacity to grow and keep their existing customers happy. Using AI Analytics, you can see forecasts with >95% accuracy for the next 12 months for your business, by branch and department, providing the number of customers, transactions, and revenue that can be expected. With AI forecasts you can anticipate exactly what to expect for your customer retention, customer engagement, and even ROI on your sales and marketing programs. This approach allows better accuracy in planning the future and anticipating the best ways to identify opportunities.
During a downturn, successful dealers forecast, then use their strong balance sheets and cash flow to purchase parts and equipment at steep discounts from their suppliers and competition. They also hire the best employees, pick up additional equipment lines and territories, and acquire assets from competitors that have failed. With this approach they create the foundation for real growth during the next upturn. A 1% improvement in customer retention usually generates a 12% annual transaction growth rate. There is less vulnerability to economic downturns when customer retention is strong. Historically, there is only a 7% to 15% reduction in transactions over a 12-18 month period during a downturn, so the improved retention easily offsets this reduction.
There are five steps management you can take now to ensure your company can weather any type of economic cycle.
- Create a forecast the next 12 months, based on your current performance, and continue to forecast by updating your results with the prior month’s revenue. With this approach your organization will have a clear picture of what will happen for the next 12 months, if you continue to operate as you have been.
A platform that is easy to use to produce accurate forecasts is Zintoro.com. Its AI Analytics program provides automated forecasts for customers and transactions, including the resulting gross margin and revenue, by company, branch, and department with a >95% confidence level.
- Use the 12-month forecast to create a plan that will maximize revenue and profits
Actions for improvements are steps that you plan to begin during the next 12 months to assure you will meet or exceed the forecast, which is your benchmark.
An action plan for an upturn provides the steps to take to overcome hurdles that are typical during an upturn, such as available working capital, delayed parts and equipment deliveries, dissatisfied customers, increased costs, and accommodating increased order frequency for parts and service with a backup plan to prevent overwhelming your employees and facilities.
An action plan for a downturn provides the steps necessary to take advantage of the next downturn.
- Identify the customers that are not profitable and take steps to reduce interactions with them.
- Determine opportunities to automate wherever possible, from equipment and customer communications to operating systems.
- Build cash and set up processes to generate a high return on capital employed.
A recession presents a set of severe financial hurdles that typically include: reduction in available capital, delayed customer payments, drop in equipment sales, decrease in rental utilization, and reduced frequency for parts and service orders.
Rank the ways to cut costs, using the improvement of employee support for your customers as the primary driver. This ranking should answer these questions:
- What is essential to keep the doors open and assure that stable customers are engaged?
- Where to invest to acquire and retain stable customers, by market and industry?
- Where to invest to hire and retain the best employees?
- Where to invest in equipment, technology, and facilities at favorable prices?
- How to keep all other costs as lean as possible?
- Where to automate and outsource?
Keep shareholders, lenders, suppliers, and employees informed.
Zintoro.com provides reports for actual results and forecasts to manage expectations and keep these groups focused on the key drivers for customer retention, customer engagement, and opportunities for improvement. Revenues and profits result from customer retention and engagement.
- Maximize cash and profits.
Implement the following actions quickly to maximize cash on hand and focus on generating additional cash to build and maintain your cash cushion.
- Monitor the cash flow weekly with a system to show actual receipts and disbursements tracked at least weekly and continually update the cash forecast for 12 months to anticipates any problem periods.
Obtain debt at favorable fixed rates and establish credit lines to ensure cash availability with reasonable lender covenants. Be aware of their liquidity options. Businesses that line up capital sources before they need funding often receive more favorable terms. Funding sources may include revolving credit lines, owner infusions, alternative financing, and private equity.
In a downturn, revenue and cash availability always fall faster than expenses. Sources of capital dry up and as inflation accelerates, costs climb faster than you can raise prices, reducing your available cash.
- Put together a list of expenses you can reduce to minimize your cash burn rate and identify sources of additional cash and when they may be required. The longest recession in the past fifty years was 18 months; most recessions last less than 12 months. Your goal is to have enough cash, including capital reserves, available to make up the difference between the potential gap in cash flow, so that you can maintain operations for twelve to eighteen months and take advantage of the opportunities that will be presented during such times to build your business.
- Manage your supply chain proactively by keeping your suppliers informed with your forecasts and requirements. Anticipate how your customers and suppliers will react when you are projecting your cash requirements.
In a recession, understanding the financial situation of your customers and suppliers is critical. It’s important to be realistic, not optimistic. Assess customers to identify which ones might slow down their payments or become unable to pay. These customers can double your working capital requirement during a downturn. Meet with your key customers and suppliers to review your forecasts and anticipate their problems by understanding their challenges, too. Negotiate payment plans with suppliers while offering incentives to customers for early payments or bulk orders.
- Evaluate your parts and equipment inventory to reduce capital employed and increase turns.
- Develop a program for recruiting and training employees. Plus, expand ways to retain your employees proactively.
- Track all sales and marketing programs with a return on investment. Cut programs that are not generating a return that you can document.
- Forecast and plan, don’t wait and react. Without planning you are put in a position of reacting by quickly cutting spending, firing employees, and putting your equipment inventory and assets out for auction at steep discounts. Reacting rather than plan can destroy your ability to recover during upturn that will follow at some point.
- Track and invest in marketing programs with the highest ROI. Compare spend for customers who were exposed to a marketing activity versus those who were not. For example, if you have an email program in place to alert your customers of specials and services you offer, compare the spend for customers with an email to those who aren’t receiving your emails. Are you calling customers regularly? Compare the spend to those you’re calling to those you haven’t called. What about contacting customer for follow-up surveys? Are the ones you talk to spending more than the ones you haven’t contacted? Below are some comparisons for a dealer over a 12-month period, as an example.
|Marketing Transactions Revenue Cost ROI times|
|Program /Customer /Customer /Customer Active Customers|
|Called 24 $128,440 $28 1231X|
|Not called 37 $93,965 $0 –|
|Emailed 30 $134,270 $35 2378X|
|No email 4 $51,0443 $0 –|
|Surveyed 16 $82,423 $35 966X|
|No survey 7 $48,616 $0 –|
Zintoro.com has developed a forecasting program that is updated monthly with your results. Just download the last two years of your invoices, plus invoices from the current year to date, and send them to Zintoro to upload into their password protected portal. They will schedule a call to review where the forecast shows you are headed and what steps you can take to change those numbers. Contact Steve Clegg at firstname.lastname@example.org for additional information.
To get started with marketing programs that you can count on to increase sales and deliver an impressive ROI, contact Debbie Frakes at email@example.com.