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What key characteristics can set your manufacturing business up to succeed during economic hardship?

What key characteristics can set your manufacturing business up to succeed during economic hardship?

Synopsis
3 Minute Read

Manufacturing businesses that embrace four key trends are best positioned to drive value and navigate through periods of economic uncertainty: • Decentralize decision-making — Communication across all levels of your business helps you respond rapidly to unexpected challenges. • Leveraging costs — Get to know your balance sheet and forecast your cash flow. • Re-assessing your operations — Produce more with what your business has. • Embracing technology — Improve processes and transform the operations of your business. Discover how each of these key characteristics can set your business up for success and how to implement these changes across your organization.

Many in the manufacturing industry are feeling the pressure of rising interest rates and increased inflation — and you may be wondering if your business is fully prepared to face the challenges ahead as the threat of a recession looms.

Our experience has uncovered four key traits that help businesses thrive through economic hardship, attract a higher purchase price in the event of a potential sale, and maximize shareholder value. Let’s review the steps your organization can take to adapt to challenges and position you for success during an era of economic uncertainty.

Decentralize decision-making

Who has the power to make decisions in your business? Having the right process, system, and accountability framework at all levels of your business will enable you to act decisively at key crossroads and respond rapidly to change. However, many businesses in the manufacturing industry rely on centralized decision-making, where key decision-makers run the company from the top of the organizational structure.

Businesses that rely on a top-down structure of command and control often struggle to remain agile and adapt in situations such as a pandemic or recession. Any delay in receiving feedback from key frontline management decreases your ability to react quickly to unanticipated challenges.

A decentralized decision-making structure will allow an organization to react dynamically to unexpected situations. Decentralization encourages open communication across all levels of your hierarchy. It also strengthens information feedback loops so that targets can be easily set and acted upon — and you can adjust quickly to overcome challenges.

Additionally, decentralizing your decision-making process may also help increase your company’s enterprise value. Businesses frequently rely on the owners to generate cash flow through existing relationships and make key operational decisions. This creates goodwill that is tied to ownership instead of the business.

Decentralizing your decision-making process creates multiple points of contact across the organization with key customers and vendors, reducing economic dependence on the current owner of the business and transferring your goodwill from personal to commercial — where your business has the capacity to sustain its ability to generate cash flow after the current owners and/or managers depart. Commercial goodwill has a significant impact on the amount a buyer may be willing to pay for your business in the future.

Leverage your costs

Regularly reviewing your debt and forecasting your cash flow can help your business thrive during economic uncertainty. Consider creating a 13-week cash flow forecast to plan for future growth and understand how money enters and exits your business.

A cash flow forecast can help you anticipate how much revenue you will lose if your materials arrive late due to supply chain disruption. The further ahead you can anticipate a cash shortfall, the more options you can pursue, such as withdrawing from your line of credit, reaching out to investors, or restructuring your debts.

Getting to know your balance sheet will also help identify areas where you may be losing profits, and potential solutions to save costs such as by restructuring your inventory to save money on storage. Monitoring your balance sheet and forecasting your cash flow will help your business look forward towards its financial future instead of backward — after you may have already lost profits.

Additionally, the state of your balance sheet can have a significant impact on your proceeds when you sell your business. A prudent buyer will evaluate the past to identify the level of working capital necessary to sustain business operations in the future.

If you are not managing your inventory levels, collecting your accounts receivable (AR) in a timely manner, or taking advantage of trade terms on your accounts payable (AP), it will be difficult to convince a potential buyer that they can implement these changes after the transaction is complete. This may raise concerns about damaging existing business relationships or the buyer may worry that changes to inventory to reduce carrying costs may impact sales and/or profits.

Re-assess your operations

Many businesses look at reducing labour costs during periods of economic uncertainty. However, reducing labour often results in unsustainable short-term benefits — and furthermore, a lack of experienced employees (especially in management) can reduce the value of the company in the event of a sale.

Instead, look at how to produce more with what your business has during time of economic hardship. You can start by reviewing the structure of your organization to identify areas where you can optimize or reduce your operating costs.

Focus on your processes and systems to identify where your business can run more effectively and efficiently — whether by introducing new workflow processes to increase productivity, providing training on new systems, or by restructuring your organization to increase capacity and revenue. These steps can help drive the value of your business and position your organization for success.

Talent retention and maintaining a skilled workforce can also increase the value of your company. A prudent purchaser will assess factors such as employee and management tenure, loyalty, level of turnover, and more when making a buying decision.

Investing in the technical competencies of your employees through learning and development programs will help grow your employees’ skills and increase the value of your business. Benefits such as further trades education will also help you retain employees during the current labour shortage and help to attract new talent to your business.

Embrace technology, but have a plan

Investing in the right technology can help your manufacturing business remain dynamic in an uncertain economic environment. Enterprise resource planning (ERP), customer relationship management (CRM), and accounting management systems can all help your business track costs, monitor performance, and adjust course to increase your profitability in a competitive landscape.

However, you risk wasting money on expensive equipment if you purchase new automation or digital tools that nobody in your workplace understands how to use. Many manufacturing businesses invested in automation and digitization during the COVID-19 pandemic but didn’t implement the necessary changes to introduce the new solutions effectively. Invest in comprehensive change management training to support your employees on how to use new platforms and automation tools to transform your operations.

With change management techniques, automation can accelerate the production rate of your business. Digital solutions such as ERPs can provide you with meaningful data and analytics all from one dashboard to track your key performance indicators (KPIs) and identify where your business is excelling as well as areas where you may need to improve.

Integrated ERP, CRM, and accounting management systems can also provide you with meaningful data analytics and reporting that you can use to improve your overall profitability through informed decision-making. Additionally, these platforms can help demonstrate trends impacting profitability to better predict performance. A key area of focus for purchasers and their lenders.is a target quality of earnings — or a review that looks beyond historic results and reflects on sustainability into the future.

Data analytics and reporting can also provide the necessary audit trail for a purchaser as part of their overall financial, legal, and operational due diligence in a more seamless and efficient manner to satisfy those requirements and conditions of closing.

Is your manufacturing business performing to its full potential?

Take our Inventory Manufacturing Health Check Assessment to find out.

Take the next steps to grow your business

Embracing these four key traits will enable your manufacturing business to respond quickly to challenges and drive the value of your company as you navigate through economic uncertainty. It can also greatly enhance the value of your business — imagine two companies operating in the same sector and generating the same level of earnings before interest, taxes, depreciation, and amortization (EBIDTA). However, one company has invested in the latest technology and systems while the other is operating on outdated technology and machinery. The first business would attract a higher purchase price although both companies operate in the same sector and generate the same EBITDA. If you need support to improve the performance of your business, contact a member of MNP’s Consulting Services team. We can provide the insight you need to build these four key characteristics into your organizational structure to help position your business to succeed.

Contact us

Hussam Malek P.Eng, M.Eng, MBA

Partner

Kevin Tremblay CPA, CA, CBV, CF

Managing Director

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