I’m concerned about two widespread industry trends with the potential to put unsuspecting marketers out of business. Literally. While not impacting every single company, these trends are so widespread I felt compelled to warn you. Both were triggered and accelerated by the recession. With that said, they aren’t just a short-term problem or a cycle marketers can wait out. Before I reveal these two lurking dangers, allow me a moment to tell how I know these trends to be factual.
At Meridian, we do a large number of petroleum business valuations and periodic financial benchmarking. Our “sweet spot” is complex operations, companies with various combination of wholesale, retail, dealer supply, lubes, cardlocks, propane, heating oil, etc. So as marketers start getting their new CPA statements each spring, we get an influx of hundreds of financial statements. With the annual statements, we also receive current comparative interim financials. For instance, if a marketer has April’s internal statement finished up when the CPA statement is published, we ask for April year-to-date with a comparison to the prior year’s April year-to-date.
This year, as we processed and calculated and compared, of all of sudden we began noticing striking similarities in two negative trends. First, across the nation, regardless of region or sector, most companies experienced margin declines — lower cents-per-gallon (cpg) gross profits.
At the same time, the volume trends had correlation as well. The greater the volume growth, the more the decline in gross profit cpg! What was clearly evident to me was this — marketers who wanted to maintain and grow volume in this declining demand economy were “buying” volume through discount pricing. Ouch!
So then you are probably asking yourself the real question of, “What happened to operating and bottom line profit for these marketers?” Well, this is where clear trends disappeared. Some marketers, despite the gross profit cpg decline were doing a masterful job retooling their business, driving efficiency, cutting out waste, and cutting unnecessary costs, to the point their bottom lines showed positive trends. However, not all had that wonderful result.
For most marketers with gross profit cpg decline, there was not enough operational savings to overcome the lower margin. Lower gross profit flowed down to a smaller bottom line. And the most disturbing part of all this was we saw the trend accelerating in this year’s results, despite fuel prices heading downward which historically produce higher margins.
Now, before I give you solutions, let me tell you about the second trend which creates the double punch of this threat. At the same time marketer margins headed south, accounts receivable Days Sales Outstanding (DSO) were growing bigger and bigger. When customers couldn’t pay their bill on time, most marketers had no collateral clout. So sadly, while these marketers operated with less profits, they simultaneously became cash-stretched. Double ouch!
And here is the saddest part of all of this– too many marketers assumed the slower receivables were just part of a bad economy and there was nothing they could do about it! They just had to wait to get paid. That thinking is so WRONG!
How do I know that? Because we started working with some marketers revamping their credit policies and procedures and guess what, those stick-in-the-muds, slow pay customers started paying!
Unfortunately, we couldn’t help them all. We know of more than a handful of marketers getting burned so badly on large bad debts that their banks threatened to call their lines of credit. We heard about one over-leveraged marketer who got slammed with two big bad debts have to turn to a competitor to bail him out and keep him in business. Not what anyone wants to do.
So, what can and should a marketer do? First, when the market changes, look at different ways to increase margin! Consider the following:
- Graph gross profit cents-per-gallon trends so you will immediately see and can act on a downtick.
- Diversify! If you can’t reverse the trend with existing product s and sectors, expand your products and services.
- Interview your top 10 customers to find out what else they use or want.
- While you are interviewing, find out the biggest common problem they have they can’t seem to solve and then you go to work on solving it (and charging for the solution).
- Think value-added services. What can you charge for that would have high ROI for your customers?
- Within your geographic scope, identify niches doing exceptionally well and then research what you could sell them.
It is really exciting to see the P&Ls if companies that are reinventing themselves and their offerings!
Next, to keep your cash healthy, realize that if your credit policies and procedures are more than five years old, they are likely totally inadequate for today’s cash-tight environment. To make sure cash keeps flowing in the door:
- Graph DSO trends and set improvement goals.
- If negative trends, then
- Review your entire credit policy for overhaul, particularly EFT and collateral
- Automate as much of your collection process as possible
- Involve sales and credit in flowcharting current procedures and snags
- Analyze prior write-offs for lessons learned
- Insist on an effective risk matrix scoring system for all customer accounts
- Review credit limits and load hold procedures
- Insist on override accountabilities (even for the owner!
- Have your credit manager attend www.PetroAnswers.com monthly non-recorded credit huddles to get cash-producing ideas from other petro credit professionals across the nation.
Know that taking these steps can make a serious improvement in your vital cash flow.
In summary, check your margins and check your DSO to make sure your company isn’t flirting with danger right now. And if you want to know more about driving your success, read a new whitepaper, “The 9 Secrets to a Successful Petroleum Business” you can get free at www.petrosuccess.com. Here’s to fatter margins and faster cash!