By Jeff Foley, CPA, Gray, Gray & Gray, LLP
Most of my clients have made money in the retail heating oil business over the last 12-plus months, and it’s no surprise. Two years of low product prices with plentiful supply, a “once in 100 years” winter last year that carried cold temperatures well into spring, and rising consumption by customers added up to make the past year a very good one for selling oil.
But, as evidenced by the warmer than anticipated season in 2015-16, things can change in a hurry. Which makes it even more important that you take advantage of the “breathing room” provided by last year’s profits to position your business for continued success, and to keep your balance sheet strong. Now is the time to take steps to ensure a more stable financial position for the foreseeable future. Here are eight key things to DO right now.
- DO keep your cash. Feeling flush can sometimes lead to an ill-advised spending spree (i.e. inventory that you love and trucks you really don’t need). It’s better to build up cash reserves against the potential of leaner times ahead.
- DO plan your tax strategy carefully. Big profits can disappear quickly if you don’t have a proper tax plan in place. Fortunately, there are some new provisions (such as a boost in Section 179 deductions) that can help protect your income, if you plan in advance.
- DO stick to your margin. Many dealers are telling us there is less pressure on margin now that overall consumer prices are down. Don’t be tempted to boost your per gallon margin target to an excessive level, as there is still a danger you could price yourself out of the market. At the same time, there is little need to squeeze profits just to sell a few extra gallons. Stay the course and keep your margins healthy.
- DO focus on receivables. With unemployment and oil prices both down, there is less chance that collecting what is due to you will cause hardship. Get paid sooner, rather than later.
- DO run each department as a profit center. Now is the time to reorganize and review each part of your business on its own merits. Track revenue against costs to make sure all departments are contributing to the overall profitability of the company. Get everybody working efficiently now so they’ll be ready if things get tighter.
- DO invest in your employees. It is always wise to invest in your number one asset – your team. Continue to invest in training (and cross-training) people to make your operation more efficient and effective. Provide your team with the tools they need to wow your customers.
- DO consider buying another company – or selling yours. Acquiring another dealer is a good way to expand your customer base and now, with a surplus of cash on hand, may be a good time to make a carefully researched purchase. On the other hand, the value of your business may never be higher, making it the perfect time to sell.
- DO prepare for another downturn. We’ve all seen the cyclical nature of the energy business, so we can’t pretend the good times will continue forever. Hope for the best, but plan for the worst by getting your business in the best shape possible now so it can survive leaner times later.
Of course there are also several DON’Ts you should avoid:
- DON’T stock up on parts “just in case.” Instead, think “just in time” as in just in time delivery of parts when you need them, which helps to reduce inventory costs and inventory “creep.”
- DON’T make capital investments unless they are absolutely necessary. As I stated above, a new truck would be nice, but is the cash outlay necessary? One or two big purchases can quickly drain the financial resources you have worked to build.
- DON’T give away service. With steady cash flow from oil sales you may be leaning toward reducing service rates or service plan prices. Resist the temptation – once lowered it is very difficult to raise rates to a profitable level again.
It is great to see a collective smile back on the face of the oilheat industry after several years of struggle with a sluggish economy and high oil prices. But as this winter shows, we can’t assume that every heating season will be long and cold, or that oil prices will always remain at the current bargain prices. We all know from experience that it pays to be plan wisely while the sun is shining.
Jeff Foley, CPA is a Partner at Gray, Gray & Gray, LLP Certified Public Accountants (www.ggg.cpas.com).