Practical thoughts on how to react to challenging times
Four of Plante & Moran’s foremost experts on manufacturing recently came together to discuss the challenges that are facing manufacturers in the Midwest and explore what organizations can do to manage them. Here’s what they had to say.
Progress has been made, but it’s not enough
Despite recent progress due to the restructuring of manufacturers and the Detroit 3, the rapidly slowing economy, increase in oil prices, declining consumer confidence, and tight consumer markets have contributed to lethargic business activity and lower vehicle sales by all OEMs. This slowdown has led to accelerated cash burn rate by the Detroit 3 and many manufacturers. At the same time, frozen credit markets restricted access to normally available capital from traditional debt and equity markets.
This will lead to accelerated business consolidation over the next 3 years, resulting in bigger, financially stronger, and operationally excellent manufacturers and suppliers. It will provide the cleansing necessary to build a solid foundation for future growth, profits, and prosperity.
Banks are feeling squeezed by the losses sustained in their portfolio and the increased cost of their borrowing. When available they’ve been increasing pricing on loans to customers. They’re more aggressive in enforcing covenants. Banks are also looking to reduce lending on receivables and inventory when their customers’ customer looks distressed or is tied to rumors of bankruptcy.
For manufacturers, the best thing to do is strive for a good working relationship with their banker, share plans, avoid surprises, and deal with increased pricing in credit markets accordingly.
Consider the following best practices:
- Check on your receivables.
- Evaluate what kinds of capital you’re tying up for customers that appear to be distressed (inventory, capital expenditures, etc.) and limit these investments if possible.
- Evaluate outstanding commercial issues (money owed, etc.), expedite negotiations, and arrange for cash payment.
- If you provide goods to a struggling customer, reducing payment terms to net 20 days or less will increase the likelihood of receiving full payments for shipments.
- If you’re a service provider, going to cash in advance or cash on delivery is recommended.
Cash is king
Companies need to assess how much cash they have today and what credit they can tap into in the future. From a credit perspective, how strong is their relationship with their bank? Is the bank hinting that loans are mispriced in the marketplace? Are you violating any loan covenants? Do you need to finance any new capital expenditures, and is the bank willing to provide lending?
If the answers to these questions are negative, it’s important to determine how to find new capital or a new lender. These answers to cash and credit questions will impact a company’s ability to survive in short term until the economy recovers.
Key indicators relative to evaluating financial health and viable business options
There are various attributes relative to identifying viable future business options. These include financial considerations focusing on liquidity and financial leverage; relationships with the bank, including covenant status; business model strength and sustainability (profitability and number of competitors); market attractiveness; and things like customer concentration, manufacturing footprint, and ease of work transfer to a new supplier.
Plante & Moran has developed a simple Diagnostic Tool to help businesses evaluate their financial health. It measures revenue trends, margin trends, income trends, depreciation and interest costs, as well as some common balance sheet data. Companies interested in this assessment should consult their advisor for guidance on how to use it as a first step in evaluating their strategic options.
Read the transcribed article