Wednesday, February 3, 2016

The need for a fire truck financial justification

If you have teenagers, you have probably heard some pitch like this:

I need a new (I-something, game-pod, gadget) because my old one doesn't work right and it doesn't play the new games.  I've done my research.  It only costs $500 and you can pay for it by charging it on your credit card and payments are only $50 per month.
Sound familiar?

Well, most fire departments sound exactly like this when they go to their council and request the money for a new fire apparatus.


Only, it sounds like this:
 We need a new engine because the old one has rust issues and is not NFPA compliant.   I've done my research.  A new engine costs about $500,000 and I have these financing quotes and the payment would only be $50,000 per year.

So, why does this approach fail?

It's because, just like your teenagers, you are forcing the decision maker to make 3 decisions at once.  And the choice becomes overwhelming to the council (or parent) and the easy and less risky answer is to just say no.

By presenting this information this way, you are forcing your council to make a justification decision, a budgeting decision, and a financing decision --- all at once.

No wonder most pitches fail.

Summary

Human nature needs time to make big complex decisions.  When you cram a bunch of decisions into one pitch, the default switch tells your council's brain to just say no.

We'll look at this in a little more detail over the next few weeks to help you develop a compelling financial justification case.

Stay safe!
John R. Hill
President
First Bankers

Wednesday, January 27, 2016

Why your fire department loses trust

I  talk to a lot of fire departments.  That's all I do every day.

And I see a frequent and disturbing attitude among many fire departments.

I hear many fire departments express a sense of entitlement and independence and lack of accountability to the communities they serve.  They feel that, because they are the fire department, they don't have to abide by anyone's rules.

So, what happens when this happens?

Economically, most fire departments are dependent upon some other entity for their revenue.  In accepting this money, the fire department is entering into a partnership.  And each partner should behave that builds trust and strengthens the relationship.

Here are news articles from just this past week about two fire departments who lost the trust of their community and what happened to them. 
Click here to read the article about the Gramercy LA Fire Department
Click here to read the article about the Stillwater NJ Fire Department

Fire departments must be trustworthy in how they spend the money they receive and be open in sharing this information.  Otherwise, the community will reject your fire department.

Summary

Fire departments no longer operate in a vacuum.  They relate and depend on other entities for their success.  Failure to honor the needs and expectations of the other partners will lead to bad results.

I had originally thought this article would be about the need for timely and accurate financial information.  But it seems that there is a larger issue at hand.  The attitude of being unaccountable will lead to the lack of accounting and then to the closing of your department.



Stay safe!
John R. Hill
President
First Bankers

Wednesday, January 20, 2016

Fire Truck Leasing: The biggest thing to avoid

I often get asked:  "What is the biggest thing you see fire departments do that they should not do?"

That's an easy question for me to answer.  I see it with almost every fire department I talk to and can cost a lot of money.

The biggest mistake I see fire departments do is to spike the ball on the 5 yard line.

What I mean by this is that the departments have conversations about financing their truck, get some general information, make a decision on that general information... then change something without evaluating the impact of the change.

Here's what this looks like:


A fire department is buying a truck and the cost is not yet finalized.  So, they talk to banks and tell them a ballpark cost of $300,000 and we're thinking about putting $50,000 down.  They get some information from a few banks and like and select Bank A.  Then, a month later, the truck price is finalized and its $312,000 and the board decided to only put $45,000 down.

A lot of things can happen.  First, rates may have changed in that month.  Or the higher amount financed leads the bank to view your fire department as a higher credit risk and increases your payment.

And since the fire department has made their "decision" and it's kind of a hassle to start over, they just accept the worse deal.

Summary

There are 2 stages in making a financing decision. 

First, to gather information - what is expected of our department?  Will we be viewed as an acceptable risk based on the general information?  What are the economics of your offer?

The second part is to select the best financing choice.  And that should always be done after you have finalized all the details of what you want to do.

P.S.  A side note,  I have seen fire departments get dramatically different final financing from the initial offers and just accept them as a matter of convenience.

Stay safe!
John R. Hill
President
First Bankers

Wednesday, January 13, 2016

More Depreciation Basics for Fire Departments

I received some emails about our article last week asking for more information.

So, here's more depreciation basics for fire departments

A for-profit company will assign a cost of depreciation to account for the declining useful life of its major purchases (such as buildings, equipment, large tools, etc.).  This cost will reduce the company's tax liability as well as accurately reflect the true cost of operating the business.

So, how does fire departments use depreciation?

Fire departments do not have to worry about the tax consequences of its operations.  But that doesn't mean that its equipment does not depreciate (or lose some useful life) each year.

So, for fire departments, depreciation is a way to account for the true costs of operating the department and to plan ahead for the funding of the replacement truck (or building, equipment, etc.).

Simply calculate the amount you should set aside each year in reserve to replace a large purchase.  For example, if you have a $500,000 fire truck that will last 20 years, set aside $25,000 ($500,000 / 20) each year to reflect how much the truck cost to use.

This is called a funded reserve and is the most conservative and effective way to prepare for a large fire purchase.  When the time comes to replace the truck (for example), you have enough in savings to pay for it.

Summary

Depreciation is an effective financial tool for any fire departments.  It's a way to accurately measure what it costs to run your fire department every year and can be used a funding tool for your replacement purchase.


Stay safe!
John R. Hill
President
First Bankers