All too often business decisions are made prior to doing the proper due diligence. People who are successful in business take the time to research their options and use at least some amount of financial analysis before making a choice. Successful propane marketers need to take a similar approach when considering additional bulk storage. We’re all very busy, but taking the time to do some basic financial projections can save you time and maybe a whole lot of money in the long run.
We get calls every day from propane retailers and oil/gas industry professionals that want to know the price for a new storage tank, skid package or transport trailer. I get the sense that many of these callers are focused only on the sale price and few really have a good grasp on the ROI or break-even point they need to achieve in order to make this a worthwhile investment. And isn’t that what it’s really all about? Why in the world would you spend tens of thousands of dollars on additional storage if you aren’t making money with it?
So let’s look at a situation where simple financial analysis can shed light on a potential investment of additional LPG storage capacity. Say for example you’re considering a new bulk plant and you want to start with 30,000 gallons of storage. You’ve decided on a skid package because it’s turnkey; comes with new tank, bulkhead, valve package, shutdown system, and pump – just hook up electrical and go. With a little research you’ve found out that you can get the skid package for about $2900/month and your current profit per gallon (margin) is $0.75*. Now you can use the following three steps to determine how many gallons you’ll need to sell in order to cover the cost of the new storage unit:
- Determine the annual cost of the new storage unit
- Calculate the number of break-even gallons per year
- Find the number of break-even gallons per week
Determine the annual cost to add the 30K gal skid
$2900 x 12 months = $34,800
Calculate the number of gallons you need to move per year to cover the payment
Take your annual cost determined in Step 1 and divide by your margin
$34,800 / $0.75 margin = 46,400 gals
Find the number of gallons you need to move per week to break-even
Divide the break-even gallons per year by 52 weeks
46,400 / 52 weeks = 892 gals
Through this analysis, you find that by selling less than half a bobtail load per week, you can cover the cost of a new 30,000 gallon skid package. Assuming all other costs are covered, everything over and above 892 gallons per week is profit.
Doing various “what-if” scenarios can also help in the decision process. For example, what if you decided to go with an 18,000 gallon skid package instead:
Annual cost to add the 18K gal skid (assume cost is $2400/month)
$2400 x 12 months = $28,800
Number of break-even gallons per year
$28,800 / $0.75 margin = 38,400 gals
Number of break-even gallons per week
38,400 / 52 weeks = 738 gals
With this type of analysis in hand, you’ll be in a much better position to make the best decision possible regarding additional locations, bulk storage or other investments. If your business is growing and you’re considering new territory or a new bulk plant, be sure to take a moment to calculate some basic financial projections. Start by asking yourself… How many gallons can we add at our new location? How many gallons can we get from our new territory? Compare those numbers to your break-even gallons and then decide what’s truly best for your business.
* Propane margins can range between $0.30 – $1.50/gallon depending on what part of the country you reside. In our area, it is currently at $0.75/gallon. Be sure to use your specific margin when doing break-even analysis.