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Description:
David's Auto Shredding
Mobile, Alabama
Why:
1. The scrap industry has come to halt. During normal times the Steel Mill will issue PO's for the month sometime during the first week of the month. Those PO's determine the price, there is almost always either an open demand (take as much as you can produce) or a set number of tons on the PO. Even when the contract is a set number of tons, it is usually as high as we could possibly put out. That means, price may vary.... but demand is almost never a problem.
2. The country is in a recession, almost certainly the worst one in our lifetimes. Recessions tend to last about eight months, this one is well underway and we should start a recovery sometime in the first quarter of 2009.
3. David's Auto Shredding is in the first year of production. Like almost any start up, there is a learning curve and there were a number of one time costs associated with getting through the first year. The learning curve is pretty much done, those one time costs are becoming fewer.
4. This month, for the first time, the Mill is not accepting shred. Not a question of price.... just not wanting to take any inventory.
What that means:
1. David's Auto Shredding has two primary methods of cash flow. One is the shred and the other is Zorba (the aluminum scrap). With the shred having been cut off, that puts the full burden of necessary cash flow over on the Zorba.
2. This is a good news, bad news scenario. We have plenty of Zorba, but the price is very low. We can produce some cash flow, but not an amount equal to fund normal operations.
What have we done:
1. We cut expenses and costs. Stewarding every dollar that comes into our possession.
2. We laid off all the labor we could. Every crew is at a skeleton level.
3. Upper management took a 40% pay cut, then three weeks later, we deferred the entire salary.
4. Every hourly worker took a 15% cut.
5. All creditors have been contacted and appraised of the situation. They are willing to be patient.
What we need:
We need a plan designed to take pressure off our cash flow needs until the Mill decides it needs shred at a price sufficient to allow us to make a profit. There are several alternatives, most of which rely on the continued patience of our creditors. However, there is an alternative that would allow us to work, take advantage of the cheap scrap available now and perhaps make us a nice profit later.
If we had an angel to provide two million dollars to buy and hold the material we could shred it and sit on the shred. Here is how the numbers break down.
We feel like it will take about four months for the market to recover, so the two million should be cut into fours. Work and buying inventory should be budgeted according to the time.
We feel like we can buy material presently for around fifty to seventy dollars a ton, as the market moves up that will move up as well. Which should be part of the plan. The first month we should try to buy as heavy as we can and take advantage of the cheaper material. The money to buy that material comes from the two million.
We then shred around twenty five hundred tons a month. We take a ninety dollars a ton from the two million for the tons we shred. The ninety dollars goes into our account and provides the cash flow for us to make payroll, pay notes, etc. That figure comes to about two hundred twenty five thousand a month, with our continued vigilance on expenses that figure will be adequate.
After the four months we should have about ten thousand tons of shred on the ground. The markets should be open again and the price should have recovered. We will then sell the shred, giving our investor fifteen dollars a ton for the use of his money.
If the totals are correct, the investor will get back one hundred fifty thousand dollars plus his two million. If that happens in a four month period, the investor will realize a forty percent annualized rate of interest. If there is a glitch and it takes six months to get his money back the return will still be twenty five percent.