What challenges are manufacturers facing in today’s marketplace?

How do the current market conditions impact your business?

These market conditions may impact your company’s ability to receive financing from the bank, its operating cash flow, and its ability to utilize its capital effectively.

Reduced financing

High interest rates, the rising cost of operations, and slowdown in market demand means that your manufacturing business is no longer able to pass its costs back to its customers. This poses a significant risk to your earnings before interest, taxes, depreciation, and amortization (EBITDA).

Your EBITDA measures the profitability and financial health of your business — however, the bank also uses it as a component to calculate your debt service coverage ratio. Variability in your EBITDA may impact your ability to meet this ratio, causing the bank to reduce the amount of money that it is willing to loan to your business. This can have a significant impact on its growth and operational performance.

Strained operating cash flow

Your operating cash flow is another key indicator of your company’s financial health. A positive operating cash flow shows that your operations are generating more money than your business is spending. This enables you to add more money to your bank accounts each month, have enough money to meet your working capital environments, and pay down your debt service coverage ratio.

However, the current market conditions may significantly reduce your operating cash flow. Additionally, vendor terms are changing — and upfront or shorter payment terms can cause additional strain on your cash flow. This means that your business may not have enough cash on hand to pay its suppliers or meet its debt obligations, resulting in production delays or reduced financing from the bank.

Rising costs and/or delayed revenue from supply chain disruptions

Broad labour shortages are impacting the manufacturing market as more employees switch companies to gain higher compensation packages. The cost to refill these vacant positions comes with a much higher wage bill than in the past. However, manufacturers risk delays in production and revenue if these positions are not filled.

At the same time, manufacturers are grappling with rising operating costs, including rent and lease rates. Material rates are also higher due to delayed cycles, limited resources, and higher logistics costs — for example, dry bulk shipping rates are 199 percent higher than in the same period last year. Global shipping delays and in-land freight rates have both increased due to unavailability of containers, shipping route congestions, and high fuel costs.

Each of these factors means that your business is paying more for materials and labour while its revenue is taking longer to arrive. This strains its operating cash flow and may have a significant impact on its overall profitability.

Ineffective capital utilization

Your manufacturing company may have purchased machinery, equipment, and other assets in the previous low interest rate environment. However, these assets may no longer generate the same amount of value because you are no longer running them at full capacity as market demand slows down.

Additionally, your company may have taken out loans for this machinery and equipment. These loans may be up for renewal at a much higher rate than they were previously — further reducing your ability to realize value from these assets and impacting your profitability.

How can manufacturers overcome these challenges?

The current market conditions have significant real-world implications for the financial health of your manufacturing business. It is critical to assess your business for potential weaknesses and threats and take the right steps to improve its performance.

MNP’s Manufacturing Health Check Assessment can help you evaluate the current state of your business. Understanding what risks are emerging or may already be present within your company can help you address them early, continue to grow, and reach your goals.

However, identifying these risks is only the first step in the right direction. Overcoming these challenges will require comprehensive strategies to improve the performance of your business, such as improving your cash flow cycle and reporting. Our next articles in this series will examine these strategies in-depth — and provide case studies showing how businesses used these strategies to improve their performance and profitability.

Take the next steps

If you need support to improve the performance of your manufacturing business, contact a member of MNP’s Consulting Services team. We can help provide the insights you need to help you grow your business through uncertainty towards success.