Incorporating Varied Competencies: How a Certified Equipment Manager (CEM) Saves Their Company Money
Wednesday, June 7, 2017
Posted by: Sharon Anderson Young, MBA
Heavy equipment is expensive. Every organization using heavy equipment has to control costs and still provide the machinery required for their work. For example, a privately-owned construction company is growing and has just acquired new projects bigger than any it has done before. How does this company make sure it gets the new equipment needed without outstripping its cash flows? This is a complex task requiring all the essential skills of heavy equipment fleet management.
There are many different options to acquire equipment, and all of them have costs and risks to consider. The decision to buy, lease, or rent is dependent upon many factors specific to any given situation. In this scenario, the decision is made to buy equipment, as the newly acquired projects are long-term, and the company expects to do similar projects in the future. However, the capital budget is limited, and the equipment must be financed over time.
How can the construction company calculate total acquisition costs for purchasing equipment? It’s more than just a matter of negotiating the sale price with the dealer! This Life Cycle Cost estimation worksheet presents an example of the factors that an equipment manager must consider and how the total acquisition costs of financed equipment can add up.
How can the equipment manager compare lending options and find a lender to rely upon? What documentation will a responsible lender require? The company has this exciting growth opportunity and needs this equipment – why does the lender want to charge a higher interest rate?
While business growth is exciting, it usually means strained cash flows. “Cash flow management for a rapidly growing, bootstrapped company can be harder than the world’s most difficult Sudoku puzzle. It’s almost a full-time job staying on top of who owes you what and who you owe, and then prioritizing those payments. All the while, you’re pushing for more growth, but with that comes additional expenses,” says Vinny Antonio, president of a rapidly growing start-up. (1)
Consider the lender’s perspective and need to manage risk. The construction company has to consider whether the benefits of its projects outweigh the risks of performing them (also known as Risk Management). The lender has to consider the same question – will the benefit of lending money to the construction company outweigh the risks? Will this rapidly growing company have the cash flows to make the payments? (3)
When applying for financing, the applicant should know their financial statements and company history, and expect to fill out an application. For larger transactions, three years of financial statements, two years of company tax returns as well as the last three years of personal financial statements and tax returns of company owners or guarantors, plus an interim statement for the most recent month-end may all be required. This documentation will help the lender see that the company is fully prepared for the application process. (2)
The construction company should work closely with the lender to realistically forecast the company’s equipment needs. How will the equipment be used, and how long will it last? How does the company estimate equipment hours and utilization? How does the company calculate internal cost recovery rates? How does the company take care of its machines? A solid, proactive Preventive Maintenance program and good financial forecasting can help convince a lender that the company can handle the demands of growth after all. In southwest Texas, Crockett County Mining Co. saw rapid growth beginning in 2009 with acquisitions and worked closely with a financing company to forecast their growth and equipment needs over the coming years. “Crockett County Mining’s growth over the last few years called for a slew of new machines to meet new demand, specifically wheel loaders, excavators, skid steers and pit trucks.” Planning to meet these needs meant carefully working out realistic estimates of how each machine would really be used. CCM openly discussed their growth and equipment hour estimates with their lender. (4) Demonstrating the company’s compliance to safety, environmental, and HR regulations also helps show a lender the company will not face legal penalties that could interfere with regular loan payments.
The construction company should research lenders online for the lender’s name and any customer reviews. The construction company should request the lender’s references, and then contact those references, and look up lending companies by name with the Better Business Bureau. https://www.bbb.org/ If someone refers a particular lender, the equipment manager should ask them specifically why they are recommending this lender. (2)
When getting ready to close the financing deal, the construction company’s equipment manager should read the final lease or loan documents and never assume they are the same as what was in a proposal! The manager should ask for copies of contracts ahead of time and review them before signing, then make sure to get counter-signed copies after signing. (2)
This scenario alone requires an equipment fleet manager with advanced skills in heavy equipment specifications, procurement, negotiations of pricing (for equipment and for financing), life cycle cost analysis, financial management, risk management, parts management, preventive maintenance, benchmarking, safety, human resources, and environmental regulations all at the same time! The Association of Equipment Management Professionals (AEMP) is a non-profit professional society that provides continuing education and professional certification in all of these competencies for heavy off-road equipment fleet managers.
For more information about AEMP’s education and CEM and CESP professional credentials, please visit http://www.aemp.org/page/CEM or contact Sharon Young, AEMP’s Certification Program Manager, email Sharon@aemp.org or phone # (970) 928-3405.
(1) Hall, John, “12 Challenges Faced by the Fastest-Growing Companies” Forbes, Nov. 3, 2013, Ret. 8/16/2016
(2) Manitzas, Lou, “Top 5 Things to Know before Applying for Heavy Equipment Financing,” Tuffwerx.com, July 11, 2013, Ret. 8/16/2016
(3) Schmidt, David, “Top 5 Equipment Financing Problems” Construction Business Owner, Oct. 14, 2014, Ret. 8/16/2016
(4) Yanik, Kevin, “High Demand: Pairing Growth with Deliverability” Pit & Quarry, Oct. 13, 2014, Ret. 8/16/2016