Meaningful Growth

Profitability

Preventing Financial Failure in a Recovering Economy

By Bryan C. Porter

Due to current economic trends, most manufacturing executives are cautiously optimistic about their financial viability during the remaining months of 2016. With that said, the manufacturing industry as a whole is still experiencing meaningful, positive growth, despite dwindling confidence in the pace of economic recovery over the past year. Executives need to balance operational optimism and market confidence with a business model that safeguards the company against financial failure.

The recent economic recession required executives to reduce both costs and margins, which resulted in lean businesses operating in a competitive global market. Business executives are now challenged with adequately equipping their business with the right tools to profitably grow in a slowly recovering marketplace. Key considerations for any business executive to meet these challenges should include proper strategic planning, training and motivating the right people in the right positions, and accurately forecasting cash flows of the business unit.

 

1. Define your business strategy

A well-designed business strategy is the most crucial step in ensuring long-term viability in the marketplace. However, due to the daily demands on executives, many small and medium-sized manufacturing firms and divisional units overlook the importance of a robust business strategy. Those that do develop strategies often reduce them to the annual budget and ignore other crucial operational components of the business, essentially making the strategies irrelevant. A properly designed business strategy weaves the mission of the company into the monthly, weekly and even daily activities of those who work for the company and are tasked with carrying out the corporate mission. A properly designed strategy will include:

  • Adequate input from relevant company stakeholders
  • A realistic assessment of the companys key short-term and long-term objectives
  • Identification of achievable steps toward specific objectives and a system to measure progress
  • Periodic review of the progress toward objectives and immediate alteration where appropriate
  • A means to communicate the evolving plan to the employees of the company

If possible, executives should obtain outside input throughout the strategic planning process and on reported progress toward short-term and long-term goals. This outside input could come from an informal board of advisors familiar with the sectors in which the company operates, a professional business advisor or another internal executive who is charged with performance of another geographic location or industry sector. A well-developed business strategy will identify internal and external risks and help avoid financial strain.

2. Develop and encourage your team

The strategic plan will only be as successful as the individuals who work toward the corporate goals on a day-to-day basis. Employee buy-in and ownership of the plan during their daily responsibilities are critical to its success. Arguably, an executive's most significant responsibility to employees of the company is to create an environment where each employee has the resources to contribute at their highest level. These resources include technical, safety and appropriate financial training to help employees understand how their daily activities contribute to the corporate mission.

Developing a proper team and creating an environment where the team can succeed is key to achieving financial stability. Employee satisfaction can directly affect your bottom line if your employees are leaving or are underperforming, it becomes that much harder to compete in a recovering economy. Executives also need to be mindful of how existing compensation packages motivate employee behavior as the business evolves. Many companies have a standard compensation package that has been in place for years despite significant changes that may have taken place in their industrys competitive landscape. Often times, dated compensation packages limit growth or are even detrimental to the overall goals of the company. A review of how the company motivates individuals through compensation, in appropriate detail, may result in a better use of corporate assets in achieving the strategic mission. The result of a properly aligned compensation program will improve company culture and create a sense of ownership, which increases participation from those who have first-hand knowledge of how to improve the day-to-day processes.

3. Monitor your cash flow

Another component of preventing financial failure is forecasting and monitoring the cash flow of the business unit. Periodic financial results are usually communicated to executives and outside stakeholders on the accrual basis of accounting. Although these financial reports are useful in determining the financial health of the company, they are based on historical results and they do not give executives complete information on the availability of future cash reserves needed to operate the business and make key decisions. Executives should develop and analyze a cash flow model to avoid expensive cash shortages and operational delays. Cash flow financial modeling should incorporate seasonal or cyclical sales trends, anticipated market conditions, changes in key customer and vendor relationships, known plant expansions or other investments in the company, costs to comply with new regulations, merger and acquisition opportunities and tax consequences to business owners. The cash flow model should be compared to the companys rolling budgeted results and help executives identify necessary changes to the existing budget for future periods.

A key component of the cash flow model is to understand and evaluate financing options available in the marketplace. Having proper financing available when the company is not under financial strain will make navigating a bump in the road more manageable and allow the company to negotiate financing options from a position of strength.

Well-Equipped Operation

Executives who take the time to develop a strategic plan, invest in their employees and regularly monitor their cash flow are better equipped to make quick and effective decisions in a challenging and dynamic marketplace, allowing them to prevent financial failure and achieve economic success.

Bryan C. Porter, CPA, MS, is a director in the Audit, Accounting and Consulting Department of Ellin & Tucker (www.ellinandtucker.com) in Baltimore, MD, where he advises privately-held businesses in various industries, including manufacturing, wholesale distribution, construction, technology and not-for-profit. Bryan is also a member of the firms Audit and Accounting Technical Standards Committee, which oversees programs designed to educate the firm and its clients on current accounting and business topics.

Tags:

Check out our latest Edition!

 

staci blog mt2

Contact Us

Manufacturing Today Magazine
150 N. Michigan Ave., Suite 900
Chicago, IL 60601

  312.676.1100
  312.676.1101

Click here for a full list of contacts.

Latest Edition

Spread The Love

Testimonials

"The article Manufacturing Today wrote about us was spot-on. It was a pleasure working with them from interview to published article and everything was as promised.” – Jennifer Brozek, inside sales, Koyo Machinery USA Inc.

Click here for more testimonials.

Back To Top