Bottom Line Garry Bartecki
Time for a check up Time to do some of that financial stuff! •C omplete internal financial statements and supporting schedules for June and then Q2. •T ime to review actual results against the plan for 2018. •T ime to update the plan for the rest of the year with specific goals in mind. •T ime to review new and used sales results to see which sales personnel need help. •T ime to check out what inventory you have and what you have ordered for the rest of the year. •T ime to review the rental fleet to see which units will be turning over within the next 12 months. •T ime to decide which rental units should be sold off. •T ime to set aside some time to study what technology you can make use of to make the company more profitable and easier to do business with •T ime to study what the competition is doing in terms of new technology.
Some will apply to you and some not. But there are about 30 major changes you need to consider seeing how your tax situation will change for 2018. Doing this NOW gives you about six months to do some planning to mitigate negative results. DO IT! For those of you thinking you will just switch to a C-Corp to avoid the whole tax personal tax issue….. STOP THINKING THAT….. In most cases the total cost of doing the switch will not offset any additional tax you may pay now. And, we all know that the tax laws change regularly, and you would not want to make the costly change to a C-Corp and then have the reason you changed disappear because they changed the law again. Back to the covenant issue. Management should take an interest in the covenant calculations because if things are tight it may cause a change in plans. There are normally two covenants dealers need to contend with: Fixed Charge Coverage and Maximum Total Funded Debt to EBITDA
Both calculations use the same calculated EBITDA number which is usually a trailing 12-month (TTM) • Time to consider getting an annual appraisal calculation, which follows a formula developed by the report for rental units as well as used equipment bank for your personal situation. The point I want to inventory. make is that the TTM figure is net of special situations • It is also time to prepare reports required by your and other normalizing adjustments. So, you want to be banks, primarily financial covenants regarding debt certain you understand how the formula was developed service coverage ratios as well as debt to equity and if any further changes are required. ratios. Fixed Charge Coverage is the adjusted EBITDA •A nd finally, it is time to get the management team together to discuss what has happened so far and what to expect for the balance of the year.
for the TTM/debt service requirements for the same period. This calculation is one management wants to pay attention to because when the coverage is close to the bank’s minimum it is time to come up with a plan I want to get into the covenants a bit more, but before I do that I want to remind you again to ask your to improve the situation before you wind up blowing a covenant which requires a waiver to avoid a default accountant to run an estimate of your 2018 tax return on the loan. In short, this is a GOOD COVENANT using the 2017 data they just used to prepare your 2017 return or an estimate you can give them for 2018 because it has the company’s best interest to avoid cash including changes in rental assets (bought purchases and flow problems. deletions.) Preparing an estimate for a C-Corp should The Total Funded Debt to EBITDA covenant is be straight forward, but for flow-through entities it is the banks way of stopping you from taking on more an entirely different matter. The Tax Cuts and Jobs Act debt than you can handle. It is calculated as Total made significant changes to tax rules for individuals. Funded Debt/Adjusted EBITDA for the TTM. It 14
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August 2018