Accounting
September/October 2001
12 months profit
wiped out in
2 months
By Geoff Coy, Certified Practising
Accountant
In this article Accountant, Geoff Coy looks at the impact the recent drop
in fuel prices has had on one dealer's business.
As the financial year drew to a close, Con reflected on how poorly his
business had done and considered the impact the GST had made on his business
sales and net profit.
In comparison to the previous
years results Con noted that:
» Fuel
sales had increased by 26,000 litres per month or 9%
ª Fuel margin
had decreased from 3.4 cpl to 2.8 cpl
ª Fuel gross profit had
decreased by $1,000 per month due to the lower margin
ªShop sales had fallen
by $8,500 per month or 4.5%
ªShop gross
profit had fallen by $3,000 per month due to the reduced sales
Con also noted that overheads had not
increased between the two years but this was not surprising as royalties
paid to his oil company could hardly increase if sales and gross profit
had reduced.
In the previous year Con had made a Net Profit before tax of $65,000
and had even managed to put a bit extra into his self managed super
fund.
Con was comparing his results for the same period this year and hilst
profits were down he was reasonably happy, given a troubled year.
He had managed to generate a net profit of $30,000 for the 10 months
to 30th April and was hopeful of some good trading results for May and
June to bring himself a bit closer to the previous year's result.
But then the wholesale price of fuel
began to drop during the months of May and June. His oil company was
continuing with the profit support but Con kept getting stuck with expensive
loads of fuel every time the price dropped.
For the months of May and June, Con
made only 0.05 cents per litre (half a cent) from the sale of fuel.
Con's combined gross profit on fuel
for those months was less than $3,000 when he had averaged $9,000 per
month up until the end of April.
Consequently, Con's business made a
net loss of $29,000 for the months of May and June combined. A result
Con attributes entirely to the erosion of his fuel margin
The profit that had taken Con 10 months
to earn had been wiped out in the space of 2 months.
Not only had his profit been wiped
out but also Con's cash flow.
As prices had gradually increased during
the year Con found more and more of his funds were being tied up in
fuel stocks and accounts receivable.
When the price began to fall Con naturally
expected the reverse to happen and his working capital would begin to
improve.
His holding of fuel and accounts receivable
had increased during the year to over $90,000 and as the wholesale price
fell by approximately 20% Con was expecting his working capital to be
freed up by about $18,000.
It did but unfortunately the net loss
of $29,000 far outweighed the reduced holding of underground fuel and
accounts receivable.
Con's liquidity had not been in good
shape and now it had deteriorated by a further $11,000.
Through the years Con had operated
his business, he always managed to make a minimum of 3.0 cents per litre.
Market forces had never allowed him to make much more and this was the
bare minimum he could operate on so as to make a satisfactory return
on his investment.
The low margins achieved in May and
June had reduced his yearly average margin to 2.4 cents per litre.
There would be no extra superannuation
contribution or return on investment this year.
When Con spoke to his Oil company representative
about the problem he was told "you've made your money through the
year with higher prices, things average out in the long run and you'll
make it up again later".
In reality, the losses that resulted for May and June
can be likened to losing sleep. You never make it up.