Find Your Ideal Profit Level in 9 Minutes or Less
Rashaan Baskerville
BIO :
Rashaan Baskerville , Director of Angus Finance , has nearly two decades of experience in the financial services and energy services fields . In his role as a fractional CFO for the fuel distribution industry , he helps dealers develop and implement business growth strategies . He can be reached at
rbaskerville @ angusenergy . com .
Find Your Ideal Profit Level in 9 Minutes or Less
By Rashaan Baskerville Now that the winter is behind us , dealers are reflecting on how things went financially and how to shift gears for the remainder of the year to get back on track with their annual profit targets . If you were like most full-service dealers , you experienced a mix of ups and downs over the course of this past winter . For the ups , you may have seen higher unit margins due to greater pricing power and the impact of hedging more gallons than you were able to sell , while on down side , you may have seen lower gallons sold and lower service and installation sales due to significantly warmer than normal weather .
For a dealer with moderate debt , the DSCR is one of the best ways to work up profit targets .
If your downs outweighed your ups , you now need to figure out how to pivot to finish the year with strength . However , before you can decide how to pivot , you need to know what target to aim for . If your company has a moderate level of debt , one of the best measurements for setting your ideal profit level is the debt service coverage ratio ( DSCR ). If your company has little or no debt , there are better ways to calculate your profit target than the DSCR . In this article , we will focus on the DSCR .
The DSCR takes into account your ability to pay all of your debt , based upon your operating profit . As a result , this ratio is often used by banks to determine borrowing levels and , once the loan is approved , banks often require borrowers to maintain a certain DSCR level for the life of the loan .
Steps to Calculate Your DSCR
1 ) 4 minutes - Calculate your Earnings Before Interest , Taxes , Depreciation , and Amortization ( EBITDA ) less Distributions : Net Income ( excluding any material non-operating items , such as gains or losses on either investments or asset sales ) + Interest Expense + Corporate Taxes + Depreciation + Amortization - Distributions
2 ) 3 minutes - Calculate your annual debt service : Annual Principal Payments + Annual Interest Payments + Annual Capital Lease Payments
3 ) 1 minute - Take the result from step 1 and divide it by the result from step 2 , the result will be your DSCR . Banks typically like for this ratio to be 1.25 or better . If your ratio is below 1.00 , you will want to take urgent action to ensure your ability to cover your debts and remain solvent .
4 ) 1 minute - Lastly , reverse the calculation to determine your ideal minimum operating profit level : take the result from step 2 and multiply it by 1.25
With these four steps completed and your new profit goal in hand , you can begin to create your plan to pivot from a weak winter to a solid yearend finish . l FON
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