Comment for BEM magazine: manufacturing and engineering sector
While business owners may be tempted to agree to work at unreasonably reduced prices in order to retain customers, to maintain turnover and to keep the workforce employed, there are risks accompanying this strategy that they would be well advised to consider in advance.
Take the example of our client, a Leicester-based laser engineering company. The Managing Director and his team were recently forced to choose between taking on work at miniscule margins, and insisting that the company maintained a realistic profit on all jobs undertaken, in spite of the cutbacks this would demand.
The decision to choose the latter option was far from easy, but the directors applied foresight, resolving that all work had to make a contribution to the business, in order to successfully steer the company through the recession. As a result, head count had to be reduced to match a depleted order book and overtime ceased, as did the hiring of temporary labour.
In situations such as these, reducing head count is often not enough. Another often targeted area is the sales and marketing function – although this can be a false economy, because good business development is never more important than when trade is sparse and competition fierce. Recognising this, the company directors resolved to keep this department intact in order to make the most of all business development opportunities, even providing additional training for the team to help them close more deals.
Furthermore, they recognised that their business needed clear direction, strong management and to exercise sound judgment in making key decisions. Therefore, rather than reducing their professional accountancy costs, they engaged Vantis’ assistance on a monthly basis to advise on and challenge their decisions and processes.
Meanwhile, the directors’ prior investment in cutting edge technology proved to be of critical value in driving efficiencies in the business, helping it maintain a competitive edge. And, although frustrated by the lack of funding available in the current climate, their careful management of cashflow and sales ledger meant that the business has not suffered any significant bad debts during the last twelve months; quite a remarkable feat.
Overall, the brave yet suitably prudent approach taken by the management team has resulted in improved fortunes for the business over the last few months. With a healthy order book and a year-end turnover predicted to exceed 2007 levels (with an acceptable pre-tax profit), the directors are now in a position to consider investing in new plant and equipment once again, which will further add to their efficiencies and competitive advantage.
Of course, things could have turned out quite differently. Had they succumbed to temptation, taking on work at no profit – and then suffered a bad debt, the business would not be seeing the ‘green shoots’ it seems to be encountering today.
The challenges presenting those in the manufacturing and engineering industry today are, broadly speaking, much the same as those facing owner-managers across the East Midlands; put simply, cashflow is still king. Master that, and the opportunities for growth and development will start to appear.