ÓäÊU "
&
ENERGY
Banking & Credit
N_p k_\
:Xj_ :ileZ_6
To overcome liquidity
challenges, address the
underlying problems
8EFK?<I A8EL8IP @J LGFE LJ# 8E; K?@J
should be the time of year when fuel dealers
are, at least temporarily, comforted by
the hum of delivery activity and an easing
of customer scrutiny regarding the price
of fuel.
This is that rare time of year when
the profits roll in. For many companies,
however, the peak of the heating season
also means that long-simmering concerns
about meeting payments become reality, as
dealers pay suppliers within days of loading
product but regularly must wait 30 days or
more for customers to pay them back.
<E; K?< :P:C<
Our industry experience tells us that
for those dealers facing a cash crunch, the
problem will be most acute by late winter
and early spring. Many dealers dread this
time of the year for this reason. My advice
to those who face this issue is to pause and
perform the analysis necessary to plot a
course to end this cycle once and for all.
Our starting point is to determine the
dealer’s current and projected liquidity
situation. When I speak of
liquidity
, I am
referring to a company’s cash on hand or its
capacity to quickly obtain cash on demand,
for example through lines of credit with
lenders and suppliers.
Liquidity can be determined by ana-
lyzing balance sheet ratios comparing
short-term assets with short-term liabilities.
Companies exhibiting strong liquidity
always seem to have more than enough
bank line availability and often don’t
need to borrow at all. Weak liquidity, by
contrast, manifests itself in the form of a
growing, year-round material balance on
your line of credit – a never-ending battle
to stay current with suppliers and vendors
or even a frustratingly slow response from
your banker when you request a larger
credit line.
KNF KPG<J F= GIF9C<D
If you are experiencing weakened
liquidity, it is important to take the time
to understand the root cause of the cash
crunch. In its simplest forms, we can clas-
sify dealer liquidity issues into one of two
distinct buckets – a
structural deficiency
or
a
profit deficiency
. The suggested course of
action to our financial and banking advisory
clients will differ depending upon which
issue is most pronounced.
A
structural deficiency
is a misalignment
in the credit facilities supporting the dealer
that has surfaced over time, generally over
the course of several years. In this situa-
tion, a loan facility intended for short-term
use now supports both short-term
and
long-term liabilities, leading to a gradual
but material reduction in available credit
space, or worse, a period of credit line over-
advances with your bank.
This situation commonly results from
a recent history of losses (e.g., from a
historically warm winter or a hedging
issue) or the use of cash from operations
to fund the purchase of long-term assets,
such as vehicles, bulk plant upgrades or
propane tanks. Effectively addressing a
structural deficiency may require a recon-
figuring of the existing loan with a bank,
the introduction of new capital or perhaps
the negotiation of modified payment terms
with suppliers and vendors.
@EJL==@:@<EK GIF=@K
In the case of a
profit deficiency
, by con-
trast, the loan structure may already be the
best the dealer can reasonably expect, but
the company is beset by consistent earnings
underperformance. In other words, the
dealer has been unable to post the profit
necessary to meet both its general expenses
and its debt obligations.
This situation is best addressed via a
comprehensive budgeting exercise that may
include rethinking long-held margin goals,
challenging expense and staffing structures,
or through improved revenue streams from
new product offerings, different service
contract offerings and revised hourly billing
rates. While on the surface the solution may
seem straightforward, in our experience
such changes are often the toughest correc-
tions for management to implement.
Following the identification of the
applicable deficiency (or deficiencies, as
both often exist at a single dealer), it can be
tough for dealers to navigate a course them-
selves to address the situation effectively.
The strengths of management teams differ
greatly in our fragmented industry. Some
companies have owners or managers well
versed in finance and banking relationships
who can effectively draw upon these skills
to proactively suggest an alternate loan
structure with a high probability of bank
approval to correct a structural deficiency.
Many other companies lack this specific
expertise. Likewise, some companies require
assistance in organizing comprehensive
budgets to segment their business, right-size
operations and address profit deficiencies.
The course of action for each issue
has, by nature, a different timeline to com-
plete and carries with it varying levels of
complexity to solve. Seeking professional
financial assistance can be a vital step in
plotting the best approach to any structural
or profit deficiencies at hand. Identifying
the cause of your company’s liquidity situ-
ation is a vital starting point in avoiding the
frustration that many dealers experience
each winter.
By Jeffrey Simpson, Angus Energy Advisory & Finance
