Looking for a way to plan when your orders follow the price of oil? Steven Palmieri, a Tax CFO, does not predict prices and does not claim any special knowledge of the oil business. What we do is read your own books, find how the swings reach you and plan cash around the lag.
A lot of Houston owners sell to the Energy Corridor, or to the companies that serve it. Their books feel the price of oil, though not on the day the price moves. A producer sees the price first. Its budget follows a few weeks or months later. Its orders to you come after that, and its payments to you come after the orders. By the time your bank balance shows a soft stretch, the price that caused it may already have recovered.
That lag is what makes planning possible. It means you usually have some warning, and the question is whether anyone is watching for it in your own numbers.
Three signs tend to show up early. The first is your order backlog, because a shrinking list of orders is the earliest signal you have. The second is how fast customers pay. When a large customer starts paying in forty-five days instead of thirty, that is a budget tightening on the other side. The third is how much inventory sits on your shelves, because stock bought for an order that never came is cash you cannot get at.
Watch those three each month, written on one short page. The aim is to notice a change in the second week and not the second quarter.
In a strong stretch, the temptation is to treat the good months as the new normal. We would suggest three habits. Put a share of every strong month into the reserve, using the rules you set for it in advance. Pay down the credit line while it costs you nothing to do so. And be slow about locking in fixed costs such as long leases and new salaries, which keep arriving when the orders do not. The page on building a cash reserve explains how to size the cushion from your own months.
When orders thin out, the plan changes from building to protecting. List the costs that can flex and in what order, so the choice is already made when you need it. Keep your credit line open and unused as long as you can. Talk to your bank early, while the statements still show the strong months, and not after they show the weak ones. And keep the closes current, because a lender who sees clean books will listen longer.
In the quiet months, the one decision to make is which three costs you would flex first if orders dropped by a quarter. Writing the list down now makes it a plan. Writing it down in the middle of the dip makes it a scramble.
Taxes follow profit, and profit follows the swing. If estimated tax payments are set from last year's strong numbers, a soft quarter still pays a big estimate. We set the estimates from the months that have closed, so the payment follows the year you are really having. The return at the end is prepared from the same books. Owners who sell into a cyclical market tend to like this part best, because it puts cash back where they need it during the dip. The dates that matter for the year are on the page about the taxes a Houston business plans cash around.
Say a supplier sells $200,000 in a strong quarter and $120,000 in a soft one, with costs of $160,000 either way. The strong quarter leaves $40,000, and the soft one is $40,000 short. A plan that moved the $40,000 into a separate account turns the soft quarter into a shortfall that was already covered. These numbers are an illustration only and not a result for a real company.
Walk us through your last two price swings on a free Second Look call, and we will mark the lag in your own books. There is nothing to sign and nothing to pay. If you would like to see the method first, read cash planning for a year that swings.
You will be talking to the Steven Palmieri practice.