As we enter the second quarter of 2021, businesses all across the land are excited at the prospect of COVID restrictions being reduced or eliminated and businesses returning to full operating capacity. We are all excited by the potential return to normalcy.
However, as Americans have been focused on defeating COVID, getting vaccinations, and returning to whatever a normal work/home life may be going forward, very few of us have been paying attention to some concerning economic trends.
In my 33 years in banking, I have learned that what is happening in the broader U.S. economy has a direct impact on business both small and large. The waste industry is no exception.
Even though the waste industry has weathered the pandemic relatively well, I am concerned about the combination of rising interest rates and rapid price increases for virtually everything we purchase. Fuel costs are up approximately 20% and climbing. The price of steel, currently at an all-time high, has increased almost 100% resulting in significant increases in roll-off and front load container pricing.
Truck prices have also been increasing for years. However, given what is happening to steel prices, they are poised for an even bigger increase in the near term. When we consider landfill price increases as well, our industry is facing serious challenges to already thin operating margins.
Interest rates are yet another challenge. Rates have spiked in the first quarter. Even though rates are still low by historical standards, the prime rate is currently 3.25%, a quarter of a percent increase represents a 7.7% increase in cost to borrow. A half a percent increase equates to a 15.4% increase in borrowing costs.
These rate increases may seem insignificant on the surface; however, for those who utilize debt to purchase trucks and inventory, or have operating lines of credit, a one quarter or half a percent increase in rate can significantly impact not only your bottom line, but also your ability to borrow.
In one of my previous articles, I explained that cash flow is the key to being able to obtain credit. Lenders are always interested in collateral; however, their primary focus is always on your ability to repay.
The combination of the current uncertainty in the U.S. economy – combined with rising borrowing rates and significant price increases – create a situation that is full of challenges for our industry in the near term.
How do we deal with these challenges? The title of this article is the answer. In business, just as in sports, we are required to “be ready NOT get ready” for whatever comes our way.
For example: if a defensive back in football knows the other team is going to throw a pass his way, if he is not paying attention, the receiver can easily run past him and score. However, if he is paying close attention and covering the receiver, he can prevent the reception and help his team win.
Business is no different. As we face the challenges that are clearly in front of us today, if we do nothing, we will pay a heavy price later. However, if we plan for those challenges and take action now, we can ensure our team survives and thrives.
My suggestion is to take a hard look at your balance sheet and income statement and determine how these issues will impact your bottom line and your “cash flow”.
Once you understand these issues, I would encourage you to look at your equipment and inventory needs for the next 12-24 months. If your cash flow will support it, and if you are borrowing to purchase these items, I would suggest you consider making these purchases sooner than later.
Acting now will protect you from future price increases, it will lock in current borrowing rates, and it may provide a competitive advantage against those who wait. Their delay could end up costing them more for both the equipment and inventory as well as borrowing costs.
As a result, you may have the ability to price more competitively because you planned ahead. Your willingness to “Be Ready NOT Get Ready” could be the key to your winning against your competition today and into the future.