How monitoring your results can help you make informed decisions for your manufacturing business

How to measure the performance of your business

The right tools and processes can help you understand how the challenges in today’s marketplace are affecting your business. Taking the steps to establish a monthly cash flow process, forecast your cash flow, and monitor your performance management metrics can help you identify areas for improvement and adjust course to weather adverse market conditions.

Investing in digitization, scenario planning, and financial modeling can help your business respond quickly to new challenges in the marketplace and set goalposts to measure its performance. Each of these tools will help you make informed decisions, measure your results, and support the future of your business in today’s turbulent economic environment:

Establish a monthly cash flow process

Establishing a monthly cash flow process can help you determine whether the solutions you implemented are enabling your business to run on a positive operating cash flow. It can also help pinpoint areas where your business is losing money — such as on high-interest loans for machinery or other debt financing activities. This allows you to take the steps to reduce these costs, such as by negotiating with lenders.

Establishing a monthly cash flow process also helps provide a baseline to support cash flow forecasting for your business. Forecasting 13 weeks ahead will help you anticipate potential fluctuations in your cash flow and take the steps to mitigate risks — such as adjusting your spending strategies or securing additional financing.

Monitor performance management metrics

Performance management metrics are crucial to help you understand factors such as how many units your business is producing, how much inventory it is storing, and how much raw material it is consuming. This knowledge can help you identify challenges and make changes to improve your financial health.

For example, you may identify excess inventory in your system and change your buying behaviour to save costs and reduce the strain on your cash flow. These metrics help you identify and control the areas where your business is losing profitability, make informed decisions to improve its performance, and support your success in challenging market conditions.

Invest in digitization

Digitizing areas of your business such as your production floor can help you optimize your operations, streamline production processes, and identify areas to reduce costs. You may find that you are using several machines at full capacity — and increase maintenance on those machines to prevent potential breakdowns.

Supply chain digitization can also help your business respond quickly to changes in the marketplace to overcome many of the most pressing challenges today. It can help you anticipate when materials are running low so that you can buy more resources on time — reducing production delays. Digitization also increases supply chain visibility, allowing you to predict disruptions and take preventative measures such as purchasing materials from another supplier.

Plan for different scenarios

Financial modeling and scenario planning can help you predict the financial impact of running your manufacturing business with fewer resources. However, these tools can also be used on an ongoing basis to help you measure your results and make informed decisions for the future.

Scenario planning can help you develop an operational budget for various situations — such as a supply chain disruption or slowdown in market demand. Communicating the results of these plans to your bank and investors will show how your business will get ahead of these scenarios, increasing their confidence.

Additionally, financial modeling can set tangible goalposts to compare against your real-world results. This helps you understand whether your business is performing as predicted in various situations — or whether you need to adjust course to improve its performance.

Case study: How an automotive parts manufacturer overcame challenges

The second article in this series examined the real-world impact of today’s market conditions on an automotive parts manufacturer that had taken out loans in the previous low interest rate environment to fuel its growth. However, continued high interest rates and the rising cost of materials and labour had lowered its EBITDA and resulted in restricted financing from the bank.

The manufacturer needed to explore different avenues to run its business with less to increase its operating cash flow and meet its debt service ratios. It first established a monthly cash flow process — which provided the baseline it needed to start forecasting its cash flow and plan a budget to mitigate its risks.

Monitoring its cash flow enabled the business to understand where it was losing money. The automotive parts manufacturer identified that it was spending a lot of money on machinery maintenance, the production of low-demand products, and upfront payments to its suppliers. It also realized that several of its customers did not pay for products on time and provided low profit margins.

The manufacturer reached out to its suppliers to negotiate better payment terms. Financial modeling and scenario planning helped supports its decision to reduce the production of low-demand products and temporarily close several high-maintenance machines. It also prioritized the customers with large profit margins and increased its payment collections activities.

This helped reduce the strain on its cash flow and allocate more money to service its debts. The automotive parts manufacturer also decided to invest in digitization to mitigate supply chain disruptions and improve productivity on its production floor. This helped to increase its efficiency and profitability even further.

The manufacturer was now operating on a positive cash flow and meeting its debt service coverage ratios to the bank. It decided to invest in further financial modeling and scenario planning to present to the bank and its investors to increase their confidence. These plans would also serve as goalposts that the business could measure its performance against in the future to determine if it was achieving the right results.

Take the next steps

If you need support to boost 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 your business navigate today’s challenging market conditions and achieve successful results.