In a survey conducted by Prime Advantage, a buying consortium for midsized industrial manufacturers, findings revealed that sixty nine percent of the respondents reported their companies have not been directly affected by the cost or availability of credit.
“Some small to mid-size companies don’t necessarily need to access the credit market as much as larger companies when it comes to directly running operations. Mid-size manufacturers are not doing as much in the form of expansion and acquisitions to where they need the outside capital. As a result, most of the manufacturers we surveyed are able to run payroll and operations without accessing additional credit,” said Mike McDonald, Vice President, New Business Relationships for Prime Advantage.
While manufacturers may not be affected directly by the financial crisis, they are experiencing weak demand from customers that do have trouble accessing the credit market. This is making it difficult for CFOs to accurately forecast results and is a major concern.
Weak customer demand is also a highlighted concern in numerous other surveys, including a recent Duke University/CFO Magazine survey.
Other concerns include forecasting, healthcare costs and supply chain risks.
Forecasting Gets Harder
Seventy-two percent said forecasting future results is a top concern for them. In these economic times, analyzing results for the next six months is a challenging prospect.
“If your demand pipeline dries up, it could be for a lot of different reasons, including customers unable to access credit -- it’s that precarious outlook and uncertainty that makes it difficult to forecast what’s going on in the next six months,” adds McDonald.
Healthcare Costs On The Rise
As more manufacturers look to cut costs as earnings fall, healthcare costs are a top concern for manufacturers as health care insurance becomes more expensive for small and mid-sized businesses.
“Unfortunately, healthcare costs ride on government improvements to our healthcare system, which may not happen in the near future,” says McDonald.
Suppliers Shutting Down
Supply chain risk is a growing concern as more suppliers risk access to capital and shutdown operations.
“Manufacturers usually have a lot of partners in their supply chain, but some of those suppliers aren’t always going to be multi-billion-dollar companies with healthy balance sheets. When business goes south, which it has, you can see some of those suppliers going out of a business. If you’re a manufacturing company and your key supplier goes out of business, it becomes a red alarm fire,” says McDonald.
A buying consortium is one possible way to help alleviate the risk of dealing with suppliers that might shutdown operations when demand starts to fall. Some consortiums will complete an audit process to ensure the suppliers follow best-in-class processes that can help them weather the storm in an economic downturn. However, not all suppliers are part of consortium, but those that are may likely be more stable than others.
The Upside to the Downturn
On a more positive note, CFOs surveyed reported an increase or steady budgets for new product development, R&D and market expansion. Twenty-one percent reported that new market entry has become a major focus this year and 45 percent of respondents expect to see an increase in productivity.
“If you have a healthy balance sheet, new product development is exactly what you should be doing right now. It’s an extremely smart business decision. But on the flip side, members also talked about cutting costs in marketing and sales. Ideally, you don’t want to trim down marketing and sales if you’re going be introducing a new product,” McDonald advises.
CFOs are also considering acquisitions as another alternative to help boost revenues. Forty-five percent of respondents are looking into acquisitions and seven percent have considered mergers with competitors, while another seven percent have considered divestitures to solve revenue issues.
“For financially healthy organizations, this is a perfect opportunity to look at your competitors in the market. Prices are low and there are plenty of opportunities for acquisitions. It’s the equivalent of buying low when the stock is low -- that’s when you want to buy,” says McDonald.
Depending on the industry, there are plenty of possibilities and new markets to enter. For instance, manufacturers of highway and construction equipment are reporting positive feedback due to the stimulus package under way. Investment in infrastructure will create new demand for their equipment.
CFOs of food service equipment manufacturers are also reporting a positive outlook thanks to the stimulus effort.
“School expansions, renovations, new hospitals and prisons -- all have kitchens that will need food service equipment and food service companies are going to see an uptick in demand because of that,” says McDonald.
In the end, CFOs are most concerned about keeping a business running properly with healthy balance sheets that can weather the downturn. McDonald stresses that a cash reserve strong enough to make payroll and able to access the credit market will help CFOs keep their companies running smoothly.
Mike McDonald is Vice President, New Business Relationships for Prime Advantage, a buying consortium dedicated to reducing the overall costs of doing business and increasing profitability for both buyers and sellers in a private network. For more information, visit www.primeadvantage.com