By John MacKenna
Veteran energy marketer and consultant Sean Cota says fuel companies are complex operations, and owners need to implement effective bookkeeping and accounting practices in order to get a firm grasp on their costs.
In a recent interview with Oil & Energy as part of the magazine’s examination of cost control measures, Cota said that bookkeeping practices may not be interesting or exciting, but they are essential to the success of a full-service fuel delivery company. “These are Main Street America businesses,” Cota said. “These people work very hard, but they were not trained in accounting. They learn it through on-the-job training.”
On the fuel sales side alone, marketers have to deal with futures pricing, hedge pricing and several different types of taxes. “And you’re not a franchise,” Cota noted. “If instead of buying a nice, shiny oil truck you bought a Subway sandwich franchise, Subway would tell you, ‘This is how we do the bookkeeping, and this is the software we use.’” Instead, fuel dealers are on their own to learn, through trial and error. “There are professionals out there who can help, but you have to ask for their help,” he noted.
Before focusing on cost controls, marketers need to learn how to measure what is happening in their businesses. “That gets to bookkeeping, and accountants are notoriously bad at bookkeeping,” Cota said. An accountant will generally be focused on overall profitability, appreciation schedules and tax savings, and he or she will assume the company knows how to maintain its own expense accounting.
“They do not focus on what areas of the business you are making or losing money on. And because there is generally a Chinese wall between accounting and bookkeeping, bookkeeping at the business evolves on its own, and accountants are not really looking at the bookkeeping functions. They aren’t going to know where the numbers come from or whether you put your propane tanks in parts and inventory or under capital. They presume you know the difference. Only industry people that have audited financials—which is fewer than 1 percent—have an accountant who actually analyzes where all these costs flow through on the financial statement.”
When a company does not establish solid bookkeeping practices in the first place, they are in the dark about what their costs really are. The owner probably knows that company operations are at least a little bit out of control, but they can’t grasp the details. Cota said he is reminded of a famous quote from former Secretary of Defense Donald Rumsfeld: “As we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know.”
“Owners in these cases know in general terms where they are headed, but they can’t control costs, because they have not been instructed on how to separate out their expenses,” Cota said. “They can ask their accountants to do this, but this is one of those things that accountants like to do the least,” Cota observed. Owners need to insist that their accountants help set up their bookkeeping, because they will not gain control of the business until they are allocating costs properly in the general ledger. “It may sound very simple, but it is something that a lot of people miss,” he added.
Companies need bookkeeping procedures that accurately reflect what is happening with items such as cash discounts. “Cash discounts relate to a reduction in the sale prices of your products,” Cota explained. “Everybody in the industry has them, but they often lump them all together. A good bookkeeping system says that a cash discount for heating oil is allocated to heating oil sales, and a discount for kerosene is allocated to kerosene sales, and so on. This lends clarity in measuring one of the most important areas of the business.”
One area where companies can easily make mistakes is in their parts inventory. “Parts inventory is the first thing to get out of control,” Cota explained. Unlike heating oil inventory, which involves only one or two grades, the parts inventory could include hundreds of different items just for nozzles.
If a company buys a lot of parts, the service team might be prepared for any repair job, but the owner will lose access to their own money, because they have spent it on items they can’t readily liquidate. “You want to turn over your parts inventory three to six times a year,” Cota said. He recommends that companies work closely with wholesalers to strike a good balance of parts in inventory and parts that the wholesalers can provide on short notice.
Excess inventory doesn’t only tie up money; it can also impede sales of new equipment. “If you can fix everything, then you can’t put in anything new,” he said.
Similarly, labor costs should be allocated accurately: air conditioning labor flows to air conditioning expenses, and service labor flows to service expenses. Companies need to be disciplined with the ledger, even though it can get complicated. For example, a company might hire a driver who is multi-talented and does air conditioning work, heating installations and burner service for the company, but they assign all costs associated with his employment to fuel sales. “You need to allocate the expenses to the right area on a monthly or perpetual basis,” he explained.
The Advantages of Clarity
Accounting software can help a company track costs effectively, whether it is an off-the-shelf product or a back-office system specialized for energy marketing, according to Cota. Whatever the software is, however, the company must apply good bookkeeping principles in advance of deployment, because the software can only do what it is programmed to do. “Garbage in/garbage out” is an expression of what happens when data is poorly organized in a software application. “You need to sit down with your accountant and bookkeeper and pay some billable time. If you don’t know where you’ve been, you won’t know where you’re going.”
Once a company understands its own financial position with clarity and can express it in current financial reports, the owner is much better positioned to manage banking relationships, according to Cota. If they find themselves needing more cash due to a lack of cold weather or other unforeseen circumstances, a banker is more apt to help them if they have a firm grasp of their own financials.
Another important advantage of strong bookkeeping system is that a company can reduce their tax payments as well as the likelihood of tax audits. Cota said companies pay different taxes at different points, and it is easy to lose track and make costly mistakes, such as counting excise tax payments within fuel costs. “You can make a lot more money by tracking how things flow and allocating costs correctly and really figuring out what the transactions of the business are.”
Cota believes in doing the costly work needed to put proper procedures in place, because it sets the stage for long-term profitable operation. “I like to think really hard once but not think really hard every day,” he said. “Later on it will be cheaper for them to do their accounting, because they’ll know where the costs are coming from, and they’ll know where their business is headed.”
A “perpetual inventory” system can be very beneficial, because it keeps continual track of inventory balances and helps companies to price parts accurately. “You will know when you write an invoice what your profit is on that item,” Cota said, and the company won’t skew its books by allocating inventory purchases to the purchase month. “Lost inventory, inventory that was not invoiced and theft will show up quickly when your inventory on hand shows up as negative.”
In the Service Department, costs for both parts and labor must be properly allocated so that managers know what different types of jobs truly cost. “Let’s say you have a target margin of 30 percent for parts and labor. If you don’t know what your parts costs are because you don’t have an inventory system and you don’t know your actual labor costs because you’re not costing them to the department, you can’t hold the service manager or sales manager accountable, because you can’t say what the numbers overall are. How can you control costs, or hold people accountable, in a fuzzy environment?”
In a business with seasonal peaks, knowing what your costs really are, gives you tools to know where you can save and where you can’t. One half of a fuel company’s sales typically occur in the 90-day winter window, and managers need to manage assignments to keep people busy as the seasons change so they are not “brushing the cows,” which is a Vermont expression for doing nothing of value.