Are you financially motivated?

July 1, 2007 By    

I pose this rhetorical question to examine some of the decisions we make in our propane companies that fly in the face of reaching for maximum financial performance.

  Carl Hughes
Carl Hughes

At times we deceive ourselves into thinking that all of our decisions are made following solid financial considerations when, in fact, they are not. As a result, our propane companies don’t reach their potential.

Let’s look at some key areas of our businesses:

Employee decisions

When was the last time you did a head count of your company to see if the employee base is as lean as possible? Do you have people whom you know are clearly unproductive and could be eliminated without being replaced?

These seemingly insensitive questions are not based on being cold-hearted. They should encourage you to look at the most expensive part of your business. If you never ask these questions, I only can assume that you spend your dollars for the highest costs in your business without regard to their impact on your bottom line.

Customer & asset management

Do you search to find assets that are servicing customers but are not producing sufficient gallons and gross margin? Do you have customers for whom you provide the same quality of service for the exact same gross return that you did 10 years ago — when you know for certain that a) your costs have gone up in 10 years and b) the dollars invested in the assets to provide the service are significantly higher than 10 years ago?

Pricing

Are you pricing all of your customer types according to a gross-margin objective that you had in place 10 years ago? Have you examined your customers’ next-best alternative to your service and pricing? Is it possible that because you don’t routinely examine these areas that you are not pricing correctly? Is it also possible that you are providing a service to a set of customers at a price level that no one in your market would match?

Are you limiting your potential?

Consider these questions about limitations:

  • Do you ever restrict gaining more customers because you don’t have the cash to buy the new steel required?
  • Do you have your sights set on a growth project, but you’ve never started the process because you lack confidence that your current debt level will allow you to do more?
  • Do you have some key employees you would like to reward but don’t feel you have the earnings necessary to support the reward mechanisms you have in place?

The top financially performing propane retailers understand that having clear financial goals and taking action to meet those goals will allow them to: service and pay down debt faster; position the company to invest in growth assets; position the company to take a leap of growth when an opportunity arises; hire a key talent for the company who will add to your sales, service or management team; and be able to reward the top performers when you hit financial targets.

Frugal financial management

Look at the results from a financial-results perspective. Let’s assume that you can improve your company’s cash flow by $100,000 per year through a combination of a leaner employee base, more operational efficiencies and/or gross margin enhancements.

Let’s do some math to estimate the future value to your company of successfully improving earnings of $100,000 per year for five years.

By simply investing the $100,000 savings each year compounded at money market rates of 4 percent, you add $563,298 in value to your company.

Assuming the same $100,000 for five years was invested in debt retirement of 8 percent, you could pay off an additional $633,593 in notes at the end of those five years.

Finally, assuming that this $100,000 per year savings could be invested in new customer tank sets with an internal rate of return of 25 percent, you would have increased the value of your company by $1,025,879!

These critical areas provide the most possibilities to improve financial performance so you can serve more customers, hire quality employees and enjoy a company with greater value.

Carl Hughes is vice president of business development for Inergy LP. He can be reached at
Chughes@InergyServices.com or 816-842-8181.

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