“Old habits die hard.” For better or worse, this well-worn phrase applies to many who operate in the fuel distribution industry. Certain habits have helped dealers run consistently efficient operations and maintain a solid customer base despite increased competition. But other habits – particularly those on the financial side of the house – have served to undermine the long-term viability of numerous companies in our industry. Many dealers are now gone and many others are locked in a daily fight just to maintain the cash, supplier credit and banking relationships necessary to pull through another winter.
The financial challenges endemic to the heating oil industry require all the support you can find and an experienced financial advisor can help you both form new habits and shape the discussions with your financing partners in a positive way. In addition to your financials, banks, private lenders and suppliers also evaluate your business acumen, your management team, and your company’s willingness to sharpen its financial discipline with the times.
After working with many fuel dealers, here are my top five reasons you should consult with an advisor on financial and banking matters to improve your operations:
- Bank lending standards remain tight.
The most recent Federal Reserve Board of Governor’s Survey of Senior Loan Officers published in August shows that in 2013, banks eased their lending policies. This is good news for small businesses; however the improvement is far from dramatic. According to the study, for those borrowers with sales of more than $50 million, 79% of banks surveyed remained unchanged in their lending policies while 18% eased standards somewhat. For those borrowers with sales of less than $50 million, which encompasses most of the fuel distribution industry participants, 90% of banks stated their standards remain unchanged versus last year and just 10% eased their standards somewhat. While any easing is welcome news after years of tight credit availability, the fact remains that borrowing remains very challenging – particularly for companies in an industry with inconsistent earnings and limited tangible collateral.
- Owners are often unaware of the factors driving a bank’s decision.
When we first meet many of our financial advisory clients, the sense of frustration that comes from months and years of dealing with a deteriorating banking relationship is palpable. This often stems from the fact that each party’s focus is quite different. While banks examine liquidity strength, cash flow cycles, industry metrics and historical profits, fuel dealers are tackling immediate operational and financial demands associated with rising commodity prices, weather demand and the need to pay suppliers immediately to get the best pricing. By acting as an interpreter of sorts, a skilled professional advisor can bridge these gaps, help the dealer anticipate the bank’s areas of sensitivity, convey the dealer’s own areas of sensitivity and formulate a lucid plan to address the financing need. An effective advisor will clue you into common ratios and metrics so you can look at your business through the lens of your bank, thus avoiding a frustrating encounter.
- Fuel dealers as a group are not effective budgeters.
I have analyzed fuel distribution companies of all sizes for more than a decade, and one thing I can say with certainty is that few dealers prepare a meaningful profit and loss projection, and even fewer prepare a cash flow projection. In prior decades, companies could survive with these projections, before high prices, commodity volatility and net customer list attrition kicked in. Nowadays, having no roadmap is a recipe for a slow but certain decline. Furthermore, the lack of a budget is an unwanted sign to your lender (or potential lender) that a management team is ill-prepared to drive activities toward concrete month-end goals and to take the hard steps increasingly necessary to maintain consistent profitability. In tight credit markets, there is scant room for excuses if profits are weak or non-existent. A good advisor can assist you in preparing these projections so that you have a guide to arrive predictably at a month-end profit goal.
- Knowing your peak cash need is critical.
Ensuring that the combination of the dealer’s bank line, supplier credit and cash on hand will be adequate to support the company through the upcoming twelve months is my greatest concern when working with my clients. Prior year losses, high commodity prices and many dealers’ entry into the propane market are just three examples of factors that can dramatically alter a company’s peak cash need. Assessing your company’s liquidity position in advance of the heating season is invaluable, due to the majority of most companies’ value being held in the customer base, and the risk of this asset rapidly deteriorating if cash runs out.
- A team approach puts banks and investors at ease.
One advantage large companies commonly have over small ones is the depth of management. The simple fact is that most fuel dealers fall into the small business category and have a limited number of managers who must wear multiple hats. Introducing a professional advisor to assist with financial planning and banking relationships – essentially acting as a part-time CFO – adds a depth of knowledge to your arsenal for just a fraction of the cost of a full time manager, helps in identifying any “blind spots” in management strategy and serves to provide comfort to financing partners by showing there is a host of subject matter expertise influencing the direction of the company.
About the Author
Jeffrey Simpson is Managing Director of Angus Energy’s Advisory & Finance team and has worked in the fuel distribution industry for seventeen years in operational, banking and financial advisory roles.Angus Advisory & Finance provides advisory services for evaluating strengths and weaknesses, improving financial management practices, supporting banking relationships and also designs/implements growth, risk management and acquisition strategies. The group also provides funded capital solutions through the investment fund, Angus Fund, L.P. Jeff can be reached at 860-299-3358 or email@example.com.