What’s the Difference Between An Ostrich and a Dealer?

An ostrich who buries its head in the sand doesn’t want to face danger – a dealer who buries their head in the sand is facing financial failure!

If there is one thing I have learned over my 30 years of working in the recreational products industry is that there is truth in the old adage “there’s nothing as constant as change!” and change is something you can’t hide from.  I’m not a messiah saying you have to embrace change, but change can signal danger and if you’re not prepared for change, and to plan for change in your business, then you may as well be that ostrich! 

You can’t control sudden changes in market conditions but you can control how you’re going to proactively prepare and respond to these changes.

One of the biggest changes we have seen recently is the devaluation of the Canadian dollar.  It is now at its lowest level since before the recession.  This should certainly resolve the issues of cross border shopping, which was a major issue for many dealers. However, what about the cost of other products that you import from the US?  Can you remain competitive based on the additional cost that will be generated by the lower Canadian dollar?  How much more floor plan financing will you require to inventory your US manufactured products?

The other major change in recent weeks is the price of oil and gas.  Last summer we were worried about gas costing $1.50 per liter and even some pessimists were saying it was going to bridge the $2.00 mark for regular gas. Did anyone in their wildest dreams think that gas would drop under a dollar per litre?  Will it draw more customers to buy bigger boats or higher CC motorcycles because the price of fuel has dropped so much?  Will consumers have more disposable income or will we be looking at massive layoffs in the oil producing provinces leading to “less boys buying less toys” and how long will this last?

I could go on listing all the danger signals, all the changes we should be aware of such as soaring household debt, overvalued housing and the plummeting TSX,  but the crucial question is, how will this impact your business and what are you doing about it?

An old colleague of mine often rants about how Dealers are so busy working “in their business” that they overlook the necessity to work “on their business”.  To effectively deal with change and deflect potential dangers that will impact your Dealership, you need to work “on your business” by incorporating the following two steps to prepare for change - and to do it now.

Step 1 – Prepare a Financial Performance Analysis

It is imperative you first create a history of financial ratios, percentages and margin analysis from at least the last 5 fiscal years of business operations.  This analysis can be calculated from  accountant prepared financial statements and your own internal accounting system. 

This not only gives you a visual presentation of how your company has performed, but more importantly, how it performed under the varying economic, political and market influences during the historical period.  This provides the building blocks for Step 2.

Step 2 – Prepare a comprehensive Financial Business Plan

The next step is to take these building blocks from the financial analysis and incorporate them into a monthly Profit and Loss statement that starts with your annual sales forecast.  Some may refer to this as a budget but that is usually reserved for expenses only. 

The Business Plan includes cost of sales for each department, sales revenue and expenses by month.  The resulting spread sheet for 12 months calculates into an annual pro forma Profit & Loss statement.  This may sound a little technical for a short article but the value of this exercise is what you can do with it once complete.  You can now address the “what ifs”, your preparation for changes in your Business Plan by running multiple scenarios.

  1. First and foremost what is your breakeven point for sales to avoid a loss
  2. What will happen if you have to reduce your units sales margin by, say, 2%
  3. What will the current economic conditions have on your sales forecast
  4. Do you anticipate any significant changes in consumer attitude – you should!
  5. What affect will these issues have on meeting your expense targets such as Salaries, Advertising and Interest Expense

To effectively deal with change you have to be prepared for change.  By building a Business Plan and then running various scenarios that will change volume of sales, cost of goods sold, margins and expenses based on your “what ifs”, you can anticipate the impact this will have on your profit.

So don’t be an ostrich, take your head out of the sand, be proactive and be prepared for the dangers that change may bring. Your Financial Performance Analysis and comprehensive Business Plan are the tools you need to deal with ever changing market conditions and a potential new business climate.

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