How to run your manufacturing business with less resources to succeed in today’s marketplace
How to run your manufacturing business with less resources to succeed in today’s marketplace
Manufacturers are facing significant pressures in today’s marketplace — from high material and labour costs to a slowdown in market demand. Each of these factors impacts its ability to meet its debt servicing coverage ratios and secure more financing from the bank.
Explore a case study showing the real-world impact of today’s market conditions on an automotive manufacturer and discover four tips to help you increase your operating cash flow and meet your debt service coverage ratios:
- Focus on the most profitable customers
- Explore different inventory management approaches
- Negotiate payment terms with your suppliers
Evaluate your products and assets
Manufacturers are facing significant pressures in today’s economic environment, including a slowdown in market demand, high interest rates, and the rising cost of materials and labour. Each of these factors impact its earnings before interest, taxes, depreciation, and amortization (EBITDA). This affects its ability to meet its debt service coverage ratios from the bank and secure more financing.
Our first article in this series covered the challenges that manufacturers are facing in today’s marketplace. This article will examine the real-world impact of these market conditions on an automotive parts manufacturer. It will also provide some steps that you can take to run your company with less to help increase its operating cash flow and meet your debt servicing ratios.
Case study: What is the real-world impact of today’s market conditions?
An automotive parts manufacturer made significant investments to support its growth both before and during the COVID-19 pandemic. Interest rates were low in 2020 — and the business took out long-term loans to purchase new equipment and machinery. It also moved to a larger facility to increase production and meet high demand.
The manufacturer relied on debt instead of capital to support its growth and began to encounter significant challenges when interest rates started to climb in 2022. The rate of its long-term loans from the bank increased while market demand for its products slowed. Additionally, the cost of materials, labour, and logistics increased, and suppliers started to demand shorter or upfront payment terms while customers took longer to pay for their orders.
Each of these factors resulted in cash leaving the business at a faster rate than it was coming in — contributing to a negative operating cash flow and lower EBITDA. The business started to struggle to meet its interest coverage ratios and the bank restricted its financing to reduce risks.
The automotive parts manufacturer is now operating with less money from the bank — and has no room to reduce labour, material, or logistics costs. It also risks losing customers if it raises the prices of its products. The business owners begin to use their personal funds to meet the debt coverage ratio from the bank and consider approaching private lenders for more financing.
However, this is an untenable solution that contributes to a vicious cycle of debt. The manufacturer needs to explore different avenues to increase its operating cash flow — giving it more money to pay off its debts and meet the new conditions from the bank.
How to run your manufacturing business with fewer resources
While the case study above focuses on a manufacturer in the automotive parts industry, the same challenges are affecting manufacturers across all industries today.
A strategy to run your company with less can help you generate more profit and meet your debt coverage ratios to receive more financing opportunities from the bank. You can get started by:
Evaluating your customers
Assess your customers to identify which customers consistently delay payments, the margins you are making from each customer, and the quantity of products you need to meet their orders.
Prioritizing customers who make payments on time and who give you large profit margins can help increase the amount of cash entering your business. This helps contribute to a positive operating cash flow and gives you more money to put toward meeting your debt service coverage ratio.
Reconsidering your approach to inventory management
You may be manufacturing more products than you are able to sell from one product line. Alternatively, there may be a product line that sells so well that your business struggles to keep enough products in stock.
Consider decreasing the production of low-demand products and increasing the production of high-demand products. Exploring approaches such as just-in-time (JIT) manufacturing or contractual manufacturing can also help reduce storage costs and free up more cash in your business.
Working with your suppliers
Suppliers are now asking for shorter or upfront payment terms. Meeting those terms can cause a drain on your cash flow — however, those who do not meet these terms risk delays in delivery. This can cause further delays in production and impact your profits.
Contact your suppliers and determine how you can work with them to reduce the upfront requirements on these payments without jeopardizing or losing those relationships. This can help decrease the strain on your cash flow and give you more money to put toward paying your debts and meeting your debt service coverage ratios.
Assessing your assets and products
Review the machinery and product lines within your business to identify which ones are the most profitable — and which ones are not returning a profit. There may be some machines that you are not using at full capacity, or some product lines that are not breaking even.
Divesting, downsizing, or temporarily closing those assets and product lines can help reduce your operating costs. This helps increase your EBITDA and meet your debt service coverage ratios.
Manufacturing Health Check Assessment
How can you make the right decisions for your business?
Each of the steps above can contribute to a positive operating cash flow, helping your business meet its debt service coverage ratios and secure more financing from the bank. However, these decisions may also have a significant impact on your relationships with your customers and suppliers.
Scenario planning allows you to anticipate the potential pitfalls of your decisions — and take the right steps to mitigate those risks. An approach that focuses on financial modeling and planning can help you make informed decisions to support the future of your business. It is essential to assess the financial outcomes of your decisions from all angles to identify potential pitfalls and avoid irreparable damage to your business.
Our next article in this series will further examine how financial modeling can help support informed decision-making in your business. Additionally, financing constraints will also make regular monitoring of your cash flow statements a vital key to success. Our next article will also cover how cash flow monitoring, financial reporting, and other tools can help you make changes to support successful outcomes for your business.
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.
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