How would you determine if the fire apparatus manufacturer on the other side of the contract is financially solid enough to build and deliver your truck?
The fire apparatus manufacturing industry is in a very tough period right now. When you enter into a significant and expensive contract with a manufacturer, how can you be sure they will be there to deliver your truck? Or honor the warranty commitment you’re paying for as part of the contract? Or, what if the manufacturer offers you a complicated financial option such as prepayment or a turn-in lease?
Being on the wrong end of an unfulfilled contract can be financially devastating and personally stressful. As stewards of public funds, you are entrusted with the responsibility of making wise choices. That used to mean simply buying the most responsive apparatus. But, in today’s environment, it now includes a financial assessment to ensure that the apparatus you buy today is delivered, covered by warranty, and has replacement and repair parts available during its useful life.
This article will fire departments analyze and understand what financial risks they are assuming in selecting a manufacturer. Here are 4 steps to understand your fire apparatus manufacturer’s financial condition:
- Listen and read. There is a lot of information available about the state of fire apparatus manufacturers in various magazines and websites devoted to the topic. What is the general consensus? Are orders down? Are their rumors about the manufacturer’s worsening financial condition? Or stories about failed contracts? While this is not a definite source of accurate information, this information should tell you to dig deeper if there are reports of financial issues. But the grapevine is a great source to understand the potential of a problem. It is not recommended that you take action solely on the negative articles or message board postings, but, rather, to dig deeper to understand the risk.
- Measure apples to apples. The easiest method to measure the financial risk of each fire apparatus manufacturer is to request their performance bond costs. A performance bond is an insurance policy. And, just like other insurance policies, the costs are established based on the risk of the insured. In this case, the fire apparatus manufacturer. The bonding company measures the risk that a manufacturer is able to “perform” on the contract – in other words, to deliver you a truck. A performance bond cost is like a golf score – the lower the better. The bond costs are stated as a dollar amount “per thousand”. Typically, performance bond costs among the top “name-brand” manufacturers run from$2 to $10 per thousand dollars. So, if the bond costs are on the higher end of this range, they have been assessed to be more risky than those with the lower bond costs. Finally, if the manufacturer can not provide a performance bond, that is a sign of extreme risk. But performance bond analysis does not provide a complete risk analysis. Bonding companies do not perform their audits continuously so the manufacturer may have worsened from the last bonding audit. A method to dig deeper is..
- Ask for financial information and understand it. The manufacturer should be able to provide you with financial information that you can use for the deepest analysis. The manufacturer should provide the last 3 years and recent financial information that is less than 90 days old. Then, either get help or understand what the financial information is telling you. A financially viable manufacturer should:
- Be profitable. The manufacturer should report a “net profit” on its income statement for each year. Profit is the money that enables the manufacturer to stay in business and honor its contracts and after-sale commitments (warranties) to its customers. Profitable companies rarely go bankrupt.
- Be relatively debt-free. The manufacturer should provide a balance sheet which is the things that it owns (“assets”) and what it owes (“liabilities”). The difference is how much of the company’s assets are owned “free and clear” (“equity”). The more equity a manufacturer has, the more it owns its assets and the less likely it will fail. Also, another bad sign is when total liabilities (” the amount that the company owes”) is increasing while the sales and profits are declining. That means it trend is to borrow more to produce each truck.
- Not have red flags. If the manufacturer’s auditor states things like “we can not render an opinion” or “ability to continue as a going concern”, these are very bad red flags that the manufacturer has deep financial issues.
Most fire departments lack the financial knowledge to perform an in-depth analysis of their manufacturer. By using these steps as a starting point to measure the financial viability, you can avoid the headaches and stress of having a failed truck purchase. You will not be put in the position that numerous unsuspecting fire departments have found themselves by losing money when buying a new apparatus.