Show Me the Money

Greetings to all. Thank you for all that you do!  Without you there is no CoolSys.

I often get questions about how a company makes investment decisions with respect to all the competing priorities it has for growth.  How do we buy trucks? Where does money for acquisitions come from? These are all good questions. Let’s see if I can help explain in 600 words or less…

CapEx

At CoolSys, we invest millions of dollars each year to accomplish different things. There is money for Capital Expenditures (known as “CapEx”). CapEx includes the purchasing of vehicles, the buying of tools, the build-out of training facilities, opening a new service office, the investments in IT infrastructure, etc. In a typical year, the money we use to invest in these types of projects is self-funded by the company’s internal cash flow from operations. We create internal budgets each year to determine how much spend will be required in each category, much like how a family budgets its income and decides how much it can spend on rent, food, eating out, vacation, clothing, car payments, etc.

Companies, just like people, have a finite amount of resources available to them. We have credit lines much like you have a credit card and we can plan for normal periods and emergencies. Only the federal government gets to spend more than it takes in. The rest of us need to balance our checkbooks based on money coming in and money going out. During this COVID-19 crisis, we dialed back our CapEx spending because the revenue that comes from restaurant, retail and construction business is down.

Acquisitions

Acquisitions are a bit more complicated.  The company has special credit lines it uses when it buys a company. This credit is like an external “checkbook,” whose sole purpose is to acquire businesses. When CoolSys buys companies, the vast majority of the money used is not internally generated. As the company gets bigger, it becomes more valuable and the difference between the price we pay for a company and the value it has when it joins CoolSys creates the return that fuels this growth. It adds debt to our overall “mortgage” (using loan language everyone can understand) and the payment on the “mortgage” does go up, but so too does the cashflow of the overall business. This credit can only be used to buy companies and we cannot borrow from those lines of credit to buy trucks, tools or computer systems.  Think of it this way — you can’t go get a mortgage that is supposed to be secured by a house and then decide instead to buy clothes, go on vacation and buy a Ford Raptor. Banks will loan you money for a mortgage to buy a house and they secure that debt against the house. Same here. Credit facilities for buying companies are secured by the assets of the companies we buy. Every vehicle title, tool, etc. secures these loans. The revenue a company generates helps determine how much debt can be used and what the value is of the company that is being bought.

Credit Types

In a nutshell, we have different types of credit just like a consumer does. We have credit lines that let us do different things, and all of it is backstopped by the business we have built and the revenue we generate. All of it is intertwined, yet separate. Our current shareholders will invest hundreds of millions in CoolSys as we grow and will not take a penny of profit out of the business while they own it. All cash generated is reinvested into the business. It’s complicated, but all very logical. Just like you are an expert in your job, those that manage all this money and its uses in accounting and finance are experts in their jobs! Okay – I’m 100 words over and I need to zip my lip.  Hang in there, CoolSys!  COVID-19 is still here, it’s busy season for most, so be safe and healthy