Joe Ciccarello, CPA
Gray, Gray & Gray, LLP
September 2011
As I write this, the oilheat industry is just coming off another price spike, during which many dealers delivered product at more than $4 per gallon. Although prices have backed off slightly these are still the highest prices we’ve seen since 2008. Yet this time around there was little panic among dealers, and no outcry from the media or public about “price gouging.”
There are several explanations for the relative calm with which we rode out this price spike. First, although $4 oil is expensive, we are still more than fifty cents below the 2008 peak prices. Media attention seemed to be focused on gasoline prices and the dramatic (and very public) rise of prices at the pump. Interviewing a fuming driver filling up his car’s tank is more compelling than talking to a homeowner about an unseen oil tank.
The price jump also came toward the end of the heating season, when volume was beginning to taper off. Many customers were not as concerned with high oil prices since they were not anticipating additional deliveries over the next several months.
Finally, oilheat customers may simply be getting used to such high prices. Once stretched to the breaking point (remember $5 oil?) it is easier for the public to accept a jump in prices, redefining “normal” levels. Some dealers sensed this and were not shy about testing the $4 per gallon barrier now, rather than attempting it early next season.
But what I fear may also be happening is that some dealers are sacrificing their margins in an attempt to hold down the retail price they charge to customers. That is a sure way to hasten the failure of your oilheat company by price cutting yourself right out of business.
If your target margin to begin the heating season was sixty-cents per gallon, there is no reason to adjust that margin downward. In fact, sixty-cents is a far smaller percentage of a $4 gallon of oil than it was when the retail price was closer to $3. If anything your margin should grow as oil prices climb, as your cost of obtaining and carrying product also rises.
You must also look at your total volume of oil sales. If you had budgeted for a sixty-cent margin on sales of 1 million gallons, your revenue should be $600,000. But if higher oil prices push sales volume lower, that number will also change. Gray, Gray & Gray’s most recent oil survey showed that the average company’s oil sales were down 35% last year. If you kept your margin the same (sixty-cents per gallon) your revenue will have fallen to $390,000.
Did your overhead costs fall the same 35%? Unlikely. Your payroll, insurance, rent, vehicle costs — all remained the same or crept higher. You need to boost your margin just to stay even.
Otherwise, at some point revenue will drop below the “break even” point. Then you will need to make some tough decisions about cost reductions, particularly on fixed costs. It may be as simple as improving your dispatch process to consolidate deliveries. Or it could require more drastic moves, like relocating your office to a less expensive site, selling trucks, or cutting employees.
The key is to remain flexible, be willing to adjust your margin to accommodate changes conditions, and remember that every one of your competitors is in the same boat. Sacrificing your margin to chase a competitor’s price is like following a rat down a sewer grate — you both end up neck deep.
My advice is to get comfortable with uncomfortably high prices. Make sure you maintain the margin you need to cover your overhead and make a reasonable profit. As the industry continues to contract, you want to be one of the survivors. And you can’t do that by giving away margin points.
Joe Ciccarello is the Managing Partner at Gray, Gray & Gray Certified Public Accountants, a Boston accounting firm (www.gggcpas.com). Gray, Gray & Gray has served the accounting, tax and business advisory needs of companies in the oilheat industry for over 65 years. Joe can be reached at (781) 407-0300, or via email at jciccarello@gggcpas.com