Given the current economic climate for midsize manufacturers in the United States, it’s time to take stock of the quality of the information contained in your company’s financial statements. Company owners and CEOs need better information to position their firms for growth.
Growth in these times? To coin a phrase, “Yes you can!” But to grow profitably you need better financial information than many manufacturers typically have in their financial statements. Better information will allow you and your management team to make more informed decisions about when, where, and how to grow profitably, now and in the future.
What Is Needed and Why
Consider the current condition of your business and answer the following questions:
- Did you hit your sales and profitability targets in 2008? Why or why not?
- Are you in declining markets or industries?
- How distinctive are your products and services compared to your competitors?
- Have the needs and desires of your best customers changed?
- Do you spend too much time and energy on unprofitable customers?
- Do you know where to prospect for new customers and your next market?
Many U.S. manufacturers of all sizes cannot answer these questions accurately enough to be able to position their businesses for profitable growth.
Mike Collins, a veteran of more than 40 years as a manufacturing executive and consultant and owner of MPC Management in Portland, Oregon, says that smaller and midsize manufacturers have to develop new strategies and approaches to grow and become more profitable. He suggests a “diagnosis before a prescription” approach and recommends answering the following questions to diagnosis your current condition:
- How much growth do you want in terms of sales and net profit?
- How is the company doing in sales, profitability, and cash flow?
- How will you finance growth?
- Do you have accurate information on costs, margins, and pricing?
- Do you know the reasons that you lose orders?
- Can you profile your best and worst customers?
- Do you know if you have a competitive advantage, and can you compare your products model-by-model to your competitors’ in terms of price, delivery, and key features?
- Do you know which market niches or customer groups to focus on now and in the future?
The following include some of the most important ways to position your company for profitable growth:
- Diversifying in the market
- Developing profitable new products and services
- Licensing products and services
- Expanding geographic sales coverage
- Developing new sales channels
- Develop acquisitions or strategic alliances
New Information from Financial Statements
Collins recommends reformatting your income statement in order to put costs in appropriate places for cost/margin analysis. He says that the income statements used by many manufacturers don’t break out cost of goods sold into direct labor, direct materials, and manufacturing overhead. In many cases these costs are commingled with all sorts of other expenses, making visibility impossible in the income statement. He recommends a reformatted income statement that breaks out the COGS item to include direct labor, material, and manufacturing overhead listed separately from sales, general, and administrative costs.
With a reformatted income statement you can begin to identify and track production costs and indirect costs. You need both to more accurately prepare quotes with the target margins you need to grow. According to Collins, this new reformatted income statement will also reveal opportunities to reduce production, office, and selling costs.
Consider what your current financial statements look like:
- Do you have sufficient visibility into your pricing process to know exactly what your margins are on every job you execute?
- Can you track each of your jobs by labor time, material costs, related tooling and setup costs, and other expenses?
- Do you know your performance on jobs as they unfold or do you have to wait for your income statement to actually determine margins?
Taking Action Today
Consider the rationale for reevaluating your company’s approach to financial statements and how new information can help you grow profitably, even in the difficult times we are currently experiencing. The case for action today is that if you begin to make these changes, your company will develop more of a competitive advantage, you will find ways to improve profitability, and you will begin developing a foundation for your company’s long-term growth plan.