Use different depreciation methods to present your best balance sheet
I visit lots of members of the NPSA and since our business is finance I have the opportunity to compare how different companies use different accounting methods. Since most companies are privately held, the accounting is for the owners to keep track of their business contrary to investor or publicly owned companies where the financial reports represent the manager’s reporting to the shareholders.
I find that the typical company pays attention to the profit and loss statement and very few companies pay attention to their balance sheet and cash flow statement. All three reports are equally important when presenting the company to an outsider such as an investor or a bank.
The balance sheet is a snapshot of the assets and liabilities of your company at one specific time (typically month, quarter and year-end). The balance sheet is the report that shows the financial strength of the company and requires special attention.
The largest asset in a portable storage company is normally the container rental fleet less accumulated depreciation. This number can vary depending on what depreciation method is used.
Container Rental Fleet
(Less Accumulated Depreciation)
Net Container Rental Fleet
Each owner decides which depreciation method he uses and for what purpose he uses his financial reports. Most companies only use one balance sheet format. However, I suggest that one should use three. One for the management of the day-to-day business, secondly, one for banks and investors and finally, one for tax purposes. While this sounds like a lot of work it could be rather simple.
The Three Accounting Methods
Management Books – Keep the value of your container fleet at cost so that you can see what you paid for an individual unit. Hence, keep your asset ledger for the container fleet at unit level so that you can see the cost for each unit. This is especially valuable when you are selling containers.
GAAP Books – GAAP stands for Generally Accepted Accounting Principles. They are accounting rules that are established with the purpose of giving a similar financial picture of all companies regardless of industry. Furthermore, GAAP provide guidelines to CPAs so that they can audit or review companies in a standardized fashion. GAAP accounting allows banks and investors to review financial reports produced in the same format and reviewed or audited in the same way. However, GAAP is not always clear and for the portable storage industry one issue is the expected economic lifetime of a storage container. Per GAAP, all assets should be
depreciated over a period that is representative of its expected economic lifetime. We all know that a storage container can last a long time and how long depends on where it is being used and how it is being maintained.
As a portable storage operator, when talking to a bank or investor, you benefit from emphasizing the long economic life time of portable storage containers. However, you have to do that in a convincing way and have supporting information. It is not good enough to say that you have owned the container for five years and it still looks the same way as when you bought it. A good way to present convincing information is to look at the depreciation policies of the public companies in our industry. I would venture to say that if we used their depreciation methods as an industry standard the individual members of NPSA would have an easier time to obtain good bank financing.
For example look at Mobile Mini, Inc.’s (MM) depreciation policy per their 2014 FORM 10-K ANNUAL REPORT
|Residual Value as Percentage of Original Cost||Useful Life in Years|
|Steel storage containers||55%||30|
|Steel security and combination offices||55%||30|
|Wood mobile offices||50%||20|
As you can see MM uses a long depreciation period and a 55% of original value equates to a very high residual container value. Since MM is publicly traded the company is scrutinized by investors and is under SEC regulations so this is a good reference to use.
Tax Books – Let your CPA run the tax books in their systems. It is a much more complex way of accounting especially if done on a per unit basis, and these books are not reflective of how your business is doing.
The Accounting System
Run your accountings system (QuickBooks, Peachtree etc.) according to the Management Books so that you can keep track of your business day to day. When it comes time to produce GAAP Books and Tax Books your accountant can make
adjusting entries. Most likely you are only going to need these reports a few times per year. However, make sure they are done in separate systems. The easiest way is to export your management books in a table format and let the CPA take it from there.