crisis over?

[Smackety]

I think some people have forgotten that businesses don't only compete on price.
The corporation I work for always has at least $2B cash and earns 70% PFO on 10B revenue per year, with 90% market share for most of our products. Our virtual monopoly is due to competing on quality, not price. As long as our customers do not all go out of business, we are going to make a killing the next decade, since our R&D budget does not depend on credit.
Well, I shouldn't say we - I work for a competitor that was bought out 7 years ago and we are in the process of transferring all manufacturing and closing the doors at my facility by early next year, at which time I am unemployed.

ETA: They also compete by buying anyone who might be a threat.

 

[drkitten]

Obviously, starting up in road-haulage can be very capital-intensive, but there are many operators out there who can continue their existing business without needing further credit. If lenders are wary, some fleet renewals might get postponed, but so what? Somebody will still take goods from A to B, as long as that somebody can invoice for more than the cost of fuel, pay, wear & tear &c.

And how do the bills get handled while you're waiting for the invoices to be paid?

If I'm driving from point A to point B, the truck needs fuel now. The invoice won't even be presented until the goods are delivered and may not be paid until next month. Someone's got to cover that gap.

And this kind of short-term smooth-out-the-cash-flow lending is the bread and butter of commercial loans.

(Not to mention the problem of paying for "wear and tear." If I get a flat today, it needs fixing today. Normally I could amortize the loss across several months cash flow, but not if there's no cash flow available.....)

 

[bobrayner]

Someone can get the goods there. Without a weeks slippage? Well, maybe. Maybe not. If you're in a big urban area, you're fine. If you're out in the country where the power can fail for a week at a time, well... stock some stuff. After all, someone theoretically should be fixing those power lines too...

So power might fail... therefore trucking is particularly vulnerable? This looks like a non sequiteur to me.

There are lots of other industries in areas unlucky enough to have such a risky electrical supply - many of them vastly more sensitive to the whims of utilities. Power outage? Road transport can continue. Hotels, offices, and other industries &c often don't. So why is trucking singled out as being vulnerable?

And how do the bills get handled while you're waiting for the invoices to be paid?

If I'm driving from point A to point B, the truck needs fuel now. The invoice won't even be presented until the goods are delivered and may not be paid until next month. Someone's got to cover that gap.

A problem which applies to most industries; trucks are nothing special in this respect. However, if it became difficult to bridge that gap, certain other industries would be more vulnerable.

If you really need next month's income to pay this month's bills then your cashflow is pretty vulnerable. This would apply regardless of which industry you're in. Some people in my industry are in the same position, but personally I'm somewhat safer since the bank account is in the black and I can pay this month's bills with money that's coming in now.

(Not to mention the problem of paying for "wear and tear." If I get a flat today, it needs fixing today. Normally I could amortize the loss across several months cash flow, but not if there's no cash flow available.....)

How does that make trucks particularly vulnerable to economic change? The same vulnerability - or worse - is visible in many other industries.

Worried about credit tightening up? Some other industries are more dependent on credit.

Worried about weak consumer demand? Some other industries are more dependent on the fickle whims of the public. Even when the public get spooked they'll still need food, toilet paper &c which will still need to be hauled around. Other industries, though, are much more sensitive...

 

[drkitten]

A problem which applies to most industries; her industries would be more vulnerable.

... which is exactly why this credit crunch is a major threat. Under "normal" risk models, when people make a list of all the problems that truckers and trucking companies are likely to face, the unavailability of day-to-day credit for operational expenses isn't on the list.

Basically, any business where cash-flow is seasonal -- which includes truckers among among the rest; more goods get moved during the summer or the immediate pre-Christmas rush, and February usually sucks -- has a serious vulnerability here. That's most businesses. Any business that relies on invoicing to pay bills instead of cash up front has a serious vulnerability here. That's almost all businesses. And any small business that doesn't have deep pockets --- and here truckers are especially vulnerable, because they're so capital intensive they're usually cash-poor -- will be hit harder than the large companies that can simply ride out the storm out of their cash reserves.

 

[Skeptic Ginger]

Just as a side note here, I purchase flu vaccine in Sept, sell it, bill for it & get paid for it in Oct and Nov, and then pay my supplier in Dec. The supplier needed the capital to produce the vaccine as they start production in June. There is no reason the manufacturer needs to run that production on credit. And the rest of the year, I don't run my business on credit either. It's only the very large outlay for my seasonal product that I appreciate the delayed payment for my supplies. But even if I didn't have that, like last year when I didn't sell all the vaccine, I still had the capital to pay for it.

The point is, one can grow a business on credit or on capital. People live without any reserves as well, not just businesses. While sometimes there are no other options, not everyone is living beyond their means nor is every company running on credit.

 

[Francesca R]

"Running on credit" does not mean "living beyond your means" any more than having a contract where the water company promises to make tomorrow's water available to you (but you don't take delivery of it now) does. If there is a burst main and you go dry, you have a problem, but normally it would not make sense to draw off a week's worth every Sunday night. .

(And yes, I know you did not say it did)

 

[Old Bob]

OK you lot you laughed when I said stock up on things you may need. I don't know how bad this will go but. Watching the shipping lane at Coloundra only one big carrier for a week heading for Brisbane, when the past one would see 4 or 5 a day. Some may come through at night, maybe. Have heard that produce must be paid for before the ship leaves port??? That worries me.

 

[roger]

It makes sense to run on credit. Not always, of course. But you have to look at the cost of capital. Having a bunch of cash just sitting around is not generally a good use of capital. Far better to invest it in your business (say you get 15% ROIC), and then borrow at a lower interest rate (LIBOR + 5 or whatever) to get past the cash flow issues. This sort of thing is covered in any first course for an MBA. heck, it's covered in any undergraduate business program. Not everyone is running a mom-and-pop 5 employee business. I challenge you to run a auto dealership without borrowing may millions to get the cars on the lot.

 

[Francesca R]

It makes sense to run on credit. Not always, of course. But you have to look at the cost of capital. Having a bunch of cash just sitting around is not generally a good use of capital. Far better to invest it in your business (say you get 15% ROIC), and then borrow at a lower interest rate (LIBOR + 5 or whatever) to get past the cash flow issues.

Just make sure you don't use no "dirty bathwater" risk model to reassure you that your funding rate can't spike to LIBOR plus infinity, right?

 

[Tippit]

It makes sense to run on credit. Not always, of course. But you have to look at the cost of capital. Having a bunch of cash just sitting around is not generally a good use of capital. Far better to invest it in your business (say you get 15% ROIC), and then borrow at a lower interest rate (LIBOR + 5 or whatever) to get past the cash flow issues. This sort of thing is covered in any first course for an MBA. heck, it's covered in any undergraduate business program. Not everyone is running a mom-and-pop 5 employee business. I challenge you to run a auto dealership without borrowing may millions to get the cars on the lot.

You used one of the most capital intensive businesses - automotive retail - as an example. Automotive manufacturing is even more so. For this reason some businesses are more dependent on credit than others, and capital intensive companies throw off less free cash flow. This is why the market rewards $1 of MSFT earnings with a much higher multiple than $1 of GM earnings, it's about the free cash.

In a business environment where many are solvent but illiquid, raising cash is a good idea where you don't have access to the corporate welfare funded by the Federal Reserve/Treasury bailouts.

 

[Old Bob]

Watching this mess unfold ,can't help but wonder if it's main reason is to down Russia and China and ruin the Euro. Russia has become a huge oil exporter by drilling 30 000 ft plus at enormous infer structure cost so drop the price of oil? China will lose it's markets causing chaos internally and Europe has blamed one another which is breaking up the European Union. Odd that the UK sat back regards changing money over to Euro. If we the little people get hurt in the process bad luck. I heard on the grape vine that product is piled up on Chinese docks.

 

[Wudang]

Watching this mess unfold ,can't help but wonder if it's main reason is to down Russia and China and ruin the Euro. Russia has become a huge oil exporter by drilling 30 000 ft plus at enormous infer structure cost so drop the price of oil? China will lose it's markets causing chaos internally and Europe has blamed one another which is breaking up the European Union. Odd that the UK sat back regards changing money over to Euro. If we the little people get hurt in the process bad luck. I heard on the grape vine that product is piled up on Chinese docks.

I'm terribly sorry but I only speak English.