Wednesday, June 22, 2016

Should you prepay your fire truck for a discount?

Over the past few weeks, I've written about fire truck prepayments - How they can be a mistake and How prepayments can lose money.

So, are fire truck prepayments and prepayment discounts a bad deal?

Not at all. 

I just write about the idea that some fire departments believe that prepaying a fire truck for a discount is a simple and free financial decision.

First, it's not simple.

Prepaying a fire truck is a complex financial decision.  You are becoming a banker.

And if you are not able to understand or protect yourself, you are taking financial risks that can harm your fire department.

Second, it's not free.

I read articles all the time where the fire department understands the discount as just a lower price.  It's not.  When you give money to get a discount, you are either losing interest on savings or paying interest when borrowing.  It's never a free choice to prepay a fire truck. 

Summary

There is a benefit when you prepay a fire truck - a lower price.  However, there is a cost in the form of lost interest or interest paid.  And you are assuming financial risks when you engage in this transaction.

I am not against prepayments or discounts.  I am against making this decision without measuring the entire transaction and making an informed decision. 


Stay safe!
John R. Hill
President
First Bankers

Wednesday, June 15, 2016

How fire truck prepayments can lose money

Last week, I offered a couple of reasons why fire truck prepayments can be a big mistake.

I received some emails asking  "exactly how can getting a discount lose money?"

Here's the math how a fire truck prepayment discount can lose money

It's easy to measure how much benefit you receive from prepaying the truck - it's the amount the manufacturer will reduce the price of the truck.

But' it's not a free financial move.  That money to prepay has to come from somewhere. 

If it's from savings or investments, you will lose the income from interest or investment gains during the time you gave the manufacturer.  In other words, it's possible to earn more than the discount you receive.

If you are borrowing money, you are paying interest to give to the manufacturer for the discount.  If the amount of interest is greater than the discount, you are losing money.

In both cases, a prepayment bond should be used to protect your prepayment.  This cost should be considered along with the lost earnings and/or interest paid to compare the true value of the prepayment discount. Sometimes, you can find that the prepayment discount is just not worth the cost.

Summary

Math matters.  While a discount seems like a free benefit, that is far from the truth.  You WILL pay some price to buy the discount and the cost may be higher than the benefit.

Stay safe!
John R. Hill
President
First Bankers

Wednesday, June 8, 2016

Why fire truck prepayments can be a huge mistake

All the apparatus manufacturers offer them.  Aren't they a good deal?

Not always.   They look like free money. But it's not free.  There is a cost and if you don't compare the cost, you can make a big financial mistake.

So, how do I know if it's a good deal or not?

When you prepay a fire truck, you are becoming a bank to the manufacturer.  That means you are using your money to fund their operations.  And that has some very large financial implications:
  1. You may be able to earn more (or pay less if borrowing the money for the prepayment) than what the manufacturer offers.  In the finance world, this is called an "alternative preferable investment".  Look at it this way, if I told you you would lose $18,000 to get a $15,000 discount, would you take the discount?  Likely, no. It's key to know to measure the benefits and cost of prepaying a fire truck.
  2. You become the bank.  Do you know how to protect yourself from the financial risk you are taking?  That means assessing credit risk and the likelihood of a successful financial conclusion.  If you are not versed in understanding the legal and financial risks of these types of payments, you could be surprised by how many things that can go wrong.
  3. You lose leverage.  The biggest tool you to have to get the manufacturer to perform is by withholding payment.  In other words, "I won't pay you until you fix these things" .  In the finance world, this is called "counter-party risk" which is a fancy way of saying: Will the other guy make good on what he promised?  When the manufacturer has the money, your options to force performance are more limited.

Summary

I'm not saying prepaying is a bad deal.  I'm just saying that it deserves some financial analysis so your fire department is sure it's making the right and comfortable financial choice.

Stay safe!
John R. Hill
President
First Bankers

Wednesday, June 1, 2016

Current fire department trends

I received comments about my recent series about 2 different approaches to fire departments.

Mostly, the question was "what's the big deal?"

Here's why your fire department must begin to think differently

The economics of providing fire fighting services are changing rapidly.  The fire service won't go away, it's just inevitable that the fire service will be much different in the years ahead.

The fire service is ripe for consolidation.  And you can read articles almost daily about fire departments studying, considering, or completing a merger or consolidation.

The labor for the fire service used to be free, staffed by volunteers.  That is a vanishing asset.  As fire departments wrestle with the costs of adding paid staff to replace a vanishing volunteer labor force, communities look at ways to be more efficient in providing this service.

The equipment for the fire service is rising much faster than revenues.  Safe, modern equipment costs a lot of money.  The technological advances carry a high cost.  This is an additional economic burden where alternatives such as consolidation much be considered so that the fire department has safe and modern equipment.

These are just two trends affecting the fire service.  There are also others that point toward a consolidated service.

Summary

Don't kid yourself.  The fire service is poised for a dramatic change in the next 10 years or so.  And my recent series about 2 different fire department separates the survivors from the extinct.

Stay safe!
John R. Hill
President
First Bankers