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Where is Our Economy Headed?
The first half of 2011 has been eventful and turbulent.
Last winter there was a tailwind of optimism blowing through the manufacturing sector. Most business experienced sales growth in 2010 and were beginning to plan for another solid year of growth in 2011.
Then spring came. The tsunami in Japan and oil crossing the $100/bbl range made businesses pause. Growth was fragile but still seemed possible. Interest rates were low, demand, especially for exports, were strong and the dollar remained weak. Labor was plentiful. Consumers were beginning to open their wallets again. But 2008-09 still lingered in the back of our minds. The effort required to retain customers, cut costs and keep our nose above water was still branded in our memories. This spring businesses were willing to put a toe new waters but weren't prepared to take the leap.
Where does this leave us today?
The European debt crisis, a slow down in China's economy, how or even whether our politicians will fund our government in August and the end of QE2 are events creating uncertainty that growth in the global and U.S. economy will continue.
On the positive side interest rates remain low, banks are willing to lend and certain industries and innovative companies are bringing new products to market. Products that need to be designed, manufactured and marketed. Recent highs in commodity prices have seen some retreat which should help reduce the margin pressure for manufacturers selling into price sensitive markets (are there any markets today that aren't price sensitive?)
Practical advice for today
Not long ago, during what must have been much better times, somebody coined the phrase "fire your customer". It was a catchy slogan suggesting some customers weren't worthy of our business. It's hardly something we can afford to do today. Earlier this month I spent time with a client working on a classic customer / supplier dynamic. The customer won't accept a price increase and the company wasn't earning a sound financialreturn on the customer's business. My client had considered firing the customer for months. After a one hour beat the bushes brainstorming session with customer service, production, finance and sales represented we came away with a laundry list of ways to serve the customer better and reduce costs to produce the product. The cross functional group even came up with a new product idea for the customer. The point is, now is the time to work extra hard to keep customers. The investment required to acquire a new customer is huge relative to the investment required to keep a current customer.
In late June a group of financial executives from our manufacturing community held a Roundtable on how to be more effective developing metrics, forecasts and systems to improve our decision making capabilities. The group walked away with a couple key takeaways. 1) how to get more value out of management reporting 2) our peer group is a great network to learn from and tap into. (There is more on the Roundtable later in the newsletter.) Consider how you and your company leverage your collective network to improve your business. Your attorney, banker, accountant, customers and suppliers want you to survive. Tap into their network to help make your business thrive.
Our last newsletter recapped the environment in our local bank market. The bank market continues to be robust. Banks are searching for sound credits to put their excess capital to work. Commercial and Industrial lending is a target growth area for many banks. Manufacturers who have managed their way through the past 3 years have a great story to tell. If you have a big project or refinancing coming up get caught up with the bank market. And don't be shy about telling your great story.
A positive note
A study published June 22nd by the American Institute of Economic Research ranks Oregon number 1 in Production Cost Efficiencies and Production Cost per unit of Output compared to other states. Our area isn't the lowest in most cost categories but our allocation of resources to produce products efficiently is the best in the country. The study highlights how the innovative culture in our manufacturing community keeps our area competitive. Congratulations.
Financial Executive Roundtable tackles Management Reporting for Better Decision Making
In late June financial executives, mostly from our manufacturing community, attended a Roundtable designed to significantly improve the value of management reporting at their company's. The basis of our discussions came from a survey taken by over 30 local manufacturers in May. The group challenged the norms of business reporting and helped one another confront and solve the business reporting issues each participant was facing.
Below is a sample of a few noteworthy items covered at the Roundtable:
IT and Costing Systems:
- System implementations rarely go as planned and frequently miss budget and target dates. The takeaway - make sure you have the right professionals on board/contracted for to manage significant IT projects. Skimping on the front end will guarantee delays, cost overruns and significant business frustration with lost opportunities.
- The simplicity of Throughput Accounting (Theory of Constraints) drove many attendees to question the complex costing systems in use today.
Budgeting and Forecasting: - Fundamentally, the value of the budget process was challenged. The arbitrary time frame used in the process, the disjointed connection with long term planning and a focus on "the world as we knew it 3, 6 and 9 months ago" were all used as arguments against the value of budgets.
- Business forecasts had many uses - some driven by external forces - others used by management to drive significant business change.
Metrics and Performance Management: - The Roundtable participants developed a process that would allow them to identify the critical metrics for their business in a dynamic, change oriented environment.
- For a step by step approach to developing the best metrics for your company take a look at "Business Performance Metrics"
Joe Connors of Pacific Continental Bank presented "Problem Loan Indicators", a list of items the bank uses as red flags to identify problem loans. Jason Orme of Talbot, Korvola & Warwick, LLP reviewed some pending state tax proposals that will impact nearly all of us; creating tax nexus, new tax burdens and/or new tax reporting responsibilities for most of our businesses.
If your company is interested in a participating in future Financial Executive Roundtables please contact me at (360) 695-8605 or
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What is KRM Business Solutions?
KRM Business Solutions is a business advisory practice started by Steve Rosvold 8 years ago.
KRM provides financial intelligence, business education and interim CFO services to agricultural and manufacturing businesses primarily in the Portland/Southwest Washington area.
Rosvold spent 22 years in finance and strategic planning at Cargill Inc and ConAgra Foods prior to founding KRM. Learn more about KRM at: www.krmbusinesssolutions.com
Closing Thoughts
Our foot may have come off the accelerator in the 2nd quarter but we don't need to slam on the brakes yet. Many of you don't have room for major cost cuts. The fat was trimmed in 2008-09 and further significant reductions could impair your ability to capture new demand when it happens. There may still be opportunities to reduce supply chain costs, capture margin on raw material price declines but significant improvements to your bottom line are going to come from increasing your top line. They are going to come from your customers, old and new.
Having systems, processes and relationships in place that effectively monitor growth in your current customer base and the success of new customer acquisition programs will be a key for many businesses during the uncertainty of the coming months. If this sounds like a job for the sales and marketing department, it is not. This is a job that requires input from your whole organization. The most important cues coming from customers are often received by an employee outside of sales or marketing. An expedited order, a product return, a late payment are signals that provide opportunities to follow up and learn more about your customer. Investing now in your employees and systems to decipher the signals your customers are sending your organization will pay dividends later.
Good luck and have fun out there!
Steve
