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Tuesday, August 16, 2016

Planning for the Future: What Your Collection Rate Says About Your Company


The past few years have been good to the solid waste industry in California. Local economies are booming―as evidenced by the many cranes in our big cities―and with that have come new revenue streams from additional commercial customers, construction and population increases. The boom has shown recent signs of weakness, however, like scarcer funding for new businesses and tech sector layoffs. Fortunately, we got a reprieve when economies abroad did not back up the change in momentum. For now, issues such as European security concerns and Brexit have helped keep the U.S. stock market strong and ward off an economic downturn here.   

But our local luck will not last forever. Garbage companies are not recession proof, and the last long downturn in the local economy certainly took a toll on everyone’s bottom line. While residential revenues tend to stay stable, save for can migration, commercial and roll-off revenues drop significantly in hard times. And it is precisely those two revenue streams that have kept solid waste businesses successful in recent years. Knowing that another downturn is inevitable, waste companies should begin to plan strategically for the future―by looking at their collection rates. 

Solid waste collection rates say a lot about a company. They determine productivity, competitiveness and operating profitability.  But most importantly, rates help establish your company’s longevity, determining contract length and the future of the organization. It’s important to remember this when jurisdictions start nit-picking collection rates, as they seem to do every few years. In good times, a collection company’s first reaction to this complaining is to forgo rate increases to gain political favor for the future. While this is a good strategy in some ways, it is not always the best one.

Before making such a decision, you should analyze your rates and see how they compare to other companies in the area. This comparison will help you gauge whether you are operating more or less efficiently than your peers. It’s also important to look at residential and commercial rate revenue streams separately. Knowing how a likely drop in either will affect operating status helps you plan ahead. 

Look backwards at how your rates have fared in less bountiful times. A dip in the economy typically leads to a decrease in commercial collection revenues, for example. Since rate increases historically have been staggered in favor of commercial collection revenues, rather than representing the true costs of collecting residential solid waste, you should begin to prepare for the worst. This means that instead of simply forgoing rate increases, you may want to start talking with jurisdictions about them now, to mitigate the future impacts of economic turmoil. Bringing up the notion of small rate increases on residential collection in good times will help lessen the blow in tough times. 

Capital expenditures are another good reason to discuss rates with jurisdictions now. This is an opportune year to buy new equipment, due to a $500,000 section 179 tax deduction for new and used equipment, and off-the-shelf software. This deduction is only good in 2016, and the equipment must be financed/purchased and put into service by December 31, 2016. You won’t be able to realize this benefit if your collection rates have not incorporated future capital costs. 

You can get rate comparison data by participating in the 2016 Armanino Solid Waste Rate Collection survey. Although there are many differences in collection rates from one jurisdiction to another, there are a lot of underlying similarities. You can use these similarities as a negotiating tactic when you’re discussing future rate adjustments with city staff and jurisdictions.  

Before you can go to a city to negotiate future rates, you should also have your company’s cost structure analyzed and compared to budgetary needs. These costs should be closely tied to all audit reports and account for any upcoming changes to service. Failing to do so could adversely affect your financial stability in any given year, causing large increases during the true-up cost analysis years, which are generally politically challenging.

Ensuring your company has the ability to operate year-over-year and obtain financial backing is essential, and having the right audit, tax and rate team in place is imperative. With the right planning and support, you can prepare for the future and make sure you aren’t caught flat-footed when the next downturn hits.

Contact David Button, Solid Waste Business Development Specialist, at David.Button@Amllp.com or 415-568-3292 or Bill Brause, Solid Waste Audit Partner, at Bill.Brause@amllp.com or 925-790-2600 with questions or for more information. Armanino LLP is the largest CPA firm based in California and has offices in San Ramon, San Jose, San Francisco, Santa Cruz and Santa Monica. Visit www.armaninollp.com to learn more.

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