Every outdoor power equipment dealer wants a successful, profitable business. They see to the business’s daily operations, ordering equipment and parts inventory, supervising the staff and servicing the customers. When the year is done, and all the hard work and dedication has hopefully paid off, what now? What do you do with any profit dollars you accrued?
For some dealers, the decision is made before the profit is even earned. Developing an annual business plan is something strongly encouraged by Steve Hoctor, a business development manager for SCOTSCO, an Oregon-based distributor. As part of the company’s dealership training, they assist dealers in developing and refining their business plans, including where and how to invest their profit dollars.
With the numerous factors that influence the success of the seasonal dealership business, it may be difficult to forecast profit earnings. Without specific forecasting, planning for business reinvestment may also be a challenge. It should, however, not be too difficult for a dealer who is very involved in the day-to-day operations of their business to know where it needs investment most. Many distributors, consultants and dealers advise investing money in similar segments of the business.
INVESTING AND BORROWING
Before deciding what to invest in, how much will you invest?
“Dealers should be putting 20 percent of their profit right back into their business,” suggests Hoctor. “The minimum they should invest each year is five percent.”
Mike Marks, from the Indian River Consulting Group, warns dealers not to invest too much too fast. “Many more people go out of business than people think because they have grown too fast,” says Marks. “After a good year they invest to grow their business, but they run out of dough and can’t keep up with it—and it kills them.” Dealers should be cautious when growing and be sure to only invest as much as they can maintain.
Marks suggests making small investments here and there instead of putting all of the investment dollars into one big investment idea. “Make lots of small bets,” says Marks. “You can lose a lot of small bets and still be here tomorrow.”
The actual dollar amount invested by a dealer depends on how much revenue is earned each year. Many times a large investment may not be entirely necessary or practical. At other times, a larger investment is needed than profit dollars will allow. When this happens, a dealer should consider the possibility of borrowing from a financial institution.
“We try to make a profit of between five and 10 percent of sales,” says Charles Winstead of Land & Coates, a five-location dealership located in the Virginia Beach area. “If we have lots of profit, we will definitely use it to reinvest. If the reinvestment is really necessary, we would borrow the money if sufficient profits were not available.”
Ideally, a dealer’s relationship with a financial institution should be built before the actual planning for reinvestment occurs. Having already built a relationship with the banker or financial institution has the potential to benefit the dealer greatly.
Stan Crader, of Crader Distributing in Marble Hill, MO, has sat on a bank board for 20 years, and has gotten to know how banks and lenders think. “I would really encourage dealers to get to know their bankers,” Crader advises. “The more familiar a loan officer is with your total operation, the better the terms you will get and the more likely it is they will approve the loan.”
Crader explains that dealers should begin to build those ties with the bank by setting up corporate checking accounts as well as lines of credit for purchasing inventory. However, building a relationship with the bank is only the first step in gaining their trust, ultimately leading to approval on a business loan. Crader warns that dealers should be prepared to prove to their bank that they are able to responsibly and effectively handle the finances of their business.