Managing Interest Costs
Editor's Note: This article is Part 2 of a Part 4 print-to-web series continuation of the article, "Models of Management: Money, Metrics and Margins" that appeared on p. 24-29 of the February 2009 Farm Equipment. In that article, six Farm Equipment "Dealership of the Year" alums shared their approaches to four key areas (cash flow, interest costs, parts and service absorption and used equipment evaluations) that will impact their business' bottom line in 2009.
To complement the dealers' views, Farm Equipment also contacted two leading farm equipment dealer consultants — Stan Jackson, Stan Jackson Consulting, and George Keen, Currie Management Consultants — for their insight. The last installment covered cash flow management, while this one focuses in on managing interest costs.
STAN JACKSON, STAN JACKSON CONSULTING
According to Stan Jackson, Stan Jackson Consulting, the importance of turnover is a story that can never be told too often. "Interest costs are hidden in every inventory, every loan and every trade account," he says. "The answer to managing interest costs is to consider every asset as inventory and manage as if it were inventory. That means all inventories, including work in process.
"Turning over all assets sounds obvious and repetitive but no other practice has a bigger influence on interest costs than total asset turnover. Of course, dealers should continue to do the obvious things: refinance at today's lower rates, establish lines of credit in advance to gain the best interest rates and use lines of credit cash when scheduled to avoid causing the bank to report excess lines of credit unused. A banker also pays higher rates on money tied up, but not used.
Jackson also recommends a careful cash budgeting process. "The cash budget gives a dealer leverage to negotiate best rates and a banker leverage to negotiate the best rates from his/her sources."
GEORGE KEEN, CURRIE MANAGEMENT CONSULTANTS
There are several things that a dealer can do to manage their interest costs, says George Keen of Currie Management Consultants.
First, he suggests moving to bank financing vs. the OEM's programs. "Sometimes, it's necessary as OEM captive financing is reduced or eliminated," he says.
Another practice he's seen used by dealers who have financed inventory (new, used or rental) is to consider selling the units that are still collateralized to relieve the debt. "Be sure when you sell these units to pay the debt down before you use any proceeds for other liabilities," he cautions.
Third, he advises dealers to reduce A/R levels through use of credit cards or manufacturer credit programs (such as Farm Plan, etc.)
Next Installment: Improving Parts & Service Absorption