When Purchasing Buses, Planning is Key

There was a time when I needed to convince bus lenders that I was a worthy risk and needed to grow the fleet. During those early years the challenge was overcoming tight cash flow and a less than stellar payment history. Paying corporate income tax was not an issue as we continued to generate losses carried forward. Later the company matured and prospered, and as a result the earlier asset created tax losses disappeared. When a company and its bottom line are healthy, you will probably find yourself paying taxes.

As you may know, one way to reduce your tax liability for the short term is to take advantage of tax laws regarding asset depreciation. Bonus, Section 179 and accelerated tax depreciation allows you to expense the asset quickly, sometimes all in the first year, therefore reducing your net taxable income. This can help you if you continue to expand and really NEED the new buses. Adding buses to the fleet only to save on taxes is not always the answer. You can grow yourself to bankruptcy. As we have referred in previous blogs, planning is a key to running a successful business. So…

Why buy?

  • Long term plan >24 months out
    • Obsolescence
      • My bus is worn out
      • Maintenance costs are extreme
      • There is no curb appeal
      • Desired amenities are lacking
      • The government says I cannot run this engine anymore

An investment made to upgrade this bus is always an option. This will depend on your market. Is there a continued need for a clean, well running and updated early model bus? Will the continued use of a refurbished bus recap the investment made to upgrade it, or will it sit in your yard regardless? Perhaps it is best to trade or sell it, keeping the fleet size the same. Can you afford a new addition, or must you replace it, not having enough business for both? These are important asset decisions every bus operator must make.

  • Planned Expansion
    • Cash reserves are up
    • More loans are paid off
    • Additional payments cash flow, new credit is available
    • Company stability is achieved. The human resources are ready for growth

Your company has matured through its last expansion, and as planned, you are financially and psychologically prepared to expand. This long-term planning takes your personal life into consideration, your goals, desired life style and planned secession.

  • Short term plan 6-24 months out
    • Market changes
      • Competition is falling short
      • New competition has entered the market
      • Economic conditions

The market drives much of what a business can and cannot do. Although a business is generally unable to control market fluctuations, it must react accordingly and be prepared to expand, maintain, or retract its business model to withstand market volatility.

  • New business
    • Existing clients demand more service
    • New clients are seeking service
    • Opportunity to operate additional types of service
  • Shift in customer expectations
    • Demand for new bells and whistles
  • Previous purchases
    • Lack of support from dealer
    • Model not performing to expectations

The above are all reasons to add or replace buses. Be careful to think it through and not make a knee jerk decision. Is the new service well planned and is ready to be marketed? Do you have a marketing plan so that potential customers know you are adding the cool new stuff? The new business your sales team has generated – what are the expectations, will early model buses work or do they require new? Business that can use your older models is golden as it keeps the debt free buses running. Can you work out the issues that you are having with the problem bus, or do you need to trade it out and take the hit? Do you have the human resources to expand? Or is it best to maintain and use the opportunity to raise rates? And by all means, run budget scenarios to explore what your proposed changes to the fleet will do to your bottom line.

  • Immediate need
    • Unexpected expansion
      • Contract awarded unexpectedly
      • Competition closed its doors

Here is where a company’s planning can pay off the most, being prepared for the unexpected. Your business plan is up to date, your financial reporting is current and accurate, your loan request package is always ready to deliver. You have solid business relationships with dealers and lenders who are always ready to assist your company’s needs.

  • Tax saving
    • Tax savings should not be the only reason to purchase
    • Incorporate your purchasing plan into your tax plan

Understand the tax saving opportunities available. Seek the help of a CPA who is familiar with your industry. Plan by budgeting. Your tax liability should not be a surprise and force you to buy December leftovers. Predict a few years out what your net income, additional purchases, and tax liability is expected to be. Then monitor and adjust as the months roll on. Do not wait until year end to make your buying decision.

  • Impact of panic year end purchasing
    • Limited choices to buy
    • Inconsistencies of last-minute purchasing
      • Varied fleet make and model
      • Different power trains
      • Amenities not available
    • Limited price negotiation
    • Limited credit negotiation
    • STRESS! Avoid it through proper planning. Be prepared.

Let the experienced team at BUSBooks help you plan your future and move your company forward. 

The next Nerd News will discuss 2018 Taxes.

Written by Tracy Fickett, CPA and Peter Shelbo, Veteran Bus Operator

BUSBooks is a unique CPA accounting firm dedicated to the motorcoach industry.

Budgets – Why they are an invaluable tool for your continued success

We spend more than we make! We need a budget.” We have all had that conversation with our partner. We begin the process, argue about who spends too much on what, make spending cuts, put it on paper, and blow it within six months. Good people find themselves in a worse spot, continuously short on cash and long on debt. In any event, many attempts fail the process because the goals are unrealistic, no cushion is planned, discipline to see the changes through is lacking, or all the above. The cycle continues, with many continuing life paycheck to paycheck. When we do that in business, the business is destined for failure. It does not need to be that way.

Budgeting for business can be a tedious process.  However, once prepared and used to monitor and evaluate actual results, it can yield great benefits to identify what is going well and what is not going well in your business.  Knowing that will allow management to take corrective action and move a company closer to its goals. Plan for success. And once you complete the process, it becomes easier, and yes I am going to say it, fun to use!

Budgeting is the process of determining your desired future financial performance and creating a plan to achieve that result.  Many times, the use of historical data aids in establishing baselines and determining reasonable relationships among revenues and expenses.  However, desired changes may require the budget to reflect different future relationships. For example, your personnel related expenses normally run 35% of gross revenues and you are planning to add another revenue stream that is more labor intensive. Keeping your budgeted personnel cost at 35% may not be adequate. You must accept a higher personnel cost percentage or increase the cost of the new service to overcome the additional labor requirement. Either way, understanding your budget and the relationships between revenue streams and related costs will help you prevent financial surprises.

There are four steps in the budget process:

  • Determining Financial Goals
  • Budget Development
  • Monitoring Results
  • Evaluating Results

Determine Financial Goals

What do you want your future financial performance to be? Are you focusing on controlling your expenses? Or do you have plans to grow your revenues or market share?  Knowing what your financial goals will go a long way in putting together a meaningful budget. “I want to make more money” needs a plan.

Budget Development

Using the financial goals determined in the first step of the process, create the budgeted results.

For example, if your financial goal is to control expenses and you are expecting no significant growth in revenues from the current year, your budget would show revenue similar to your prior year amount with a focus on controlling key expenses that when reduced, would lead to higher net income for your budgeted period.

Alternatively, a budget for a growth-oriented year would reflect the desired increase in revenues.  The expense accounts related to that revenue production would then be based on the budgeted revenues reflecting any expected cost increases to produce that revenue.

How can you grow revenue without spending it all as expense? Can you withstand a reduction in revenue without reducing net income? Knowing the relationships between revenue and expense can help you obtain your desired results.

Monitoring Results

As the year progresses, reports comparing actual numbers to budgeted are necessary tools to help management monitor company results.  Differences between the two sets of numbers identify what revenues or expenses exceed, meet, or come in under budgeted amounts.  Whether or not those results are good or bad depends on your financial goals and how the difference flows to the bottom line, your net income. Evaluate these differences to determine if operations are being managed to achieve the financial goals set in the budget.

Evaluating Results

Evaluating the over and under budget amounts is the key step in determining what processes are working to achieve desired results and more importantly, which ones are not.  Knowing which financial goals are unrealized and then determining why, will help steer management in taking corrective action that will get the company back on track to achieve its desired results.

Importantly, you must have the discipline to stick with your budget plan. Monitor and evaluate your progress with each set of monthly financial statements. As time goes on you will have a better feel of your financial performance and be able to make informed business decisions, not decisions based on a hunch.

Many modern accounting software systems have features that allow users to obtain reports which can be useful for budget development, and budget to actual reporting options that can make the monitoring and evaluation steps a little easier. An Industry CPA is trained and experienced to assist you in this process.

Let us at BUSBooks help you develop and monitor your budget! Together we can move you toward your next goal.

The next Nerd News will discuss your Chart of Accounts: Making more sense of your numbers.

Written by Tracy Fickett, CPA and Peter Shelbo, Veteran Bus Operator

BUSBooks is a unique CPA accounting firm dedicated to the motorcoach industry.