Growth can be exciting, but also daunting. Developing a plan that includes an investment and funding strategy, and executing on that plan require time and attention beyond the day-to-day running of a business.
The savvy manufacturer recognizes both the potential rewards of growth and the challenges.
Before deciding to grow, I encourage manufacturers to ask key questions:
1) What levers do I have to help manage cash flow while investing in growth
and during periods of slower sales?
2) What is my greatest profit opportunity: expanding sales or increasing
operational efficiency with new equipment or by better managing
3) What metrics should I track to see both the costs associated with growth
and near-term and long-term revenue so I can measure my company’s
4) How long can we grow, and are we prepared for potential slowdowns?
5) Is there an ideal size for my business so I’m competing in my sweet spot
and where overhead and incremental fixed costs do not become a drain?
Growth strains a manufacturer’s cash flow as investments in equipment, raw materials and staff may run at a faster clip than revenue and collections. This is one of the reasons “smart growth” is more important than ever. I’ve found that before diving headlong into expansion, manufacturers should step back and look at the three steps to help achieve smart growth.
1. Plan for smart growth.
Granted, sometimes growth just happens. But other times, it requires deliberate planning. We typically find the manufacturers that are expanding most effectively have a growth plan that defines objectives, provides the strategy and tactics for expanding the business. This plan looks at opportunities, but it also identifies the risks. These plans are reviewed and refined quarterly, if not monthly, as goals are met or missed and circumstances change.
2. Invest in the plan.
Look for profit-generating opportunities to invest in your business. Small and medium-size businesses clearly understand the value of investing in their companies; as the U.S. economy strengthened in 2014 and 2015, three out of four business owners invested in their operations and a similar ratio said they intended to invest in the coming year, according to last fall’s Bank of the West Small Business Growth Survey.
3. Funding the growth plan.
Once a manufacturer has plans and investment strategies in place, the next question is how are they funded?
Six years after the U.S. economy began to recover from the Great Recession, manufacturers and other businesses are still cautious about borrowing and are relying on cash flow. Our survey found that while many small businesses are poised to grow, only 31% plan to acquire financing in the next year.
Opting for cash or using credit have very different implications. Relying on excess cash generated by the business saves financing and interest costs and may reduce risk. Relying on profits to grow imposes financial discipline that may help keep a business from expanding too rapidly.
But, counting solely on excess cash may constrain growth and limit a manufacturer’s flexibility in good times and bad. Conventional lines of credit, commercial real estate loans, and Small Business Administration (SBA) loans have helped many manufacturers to expand in economic upturns as well as ride out rough patches or business disruptions.
Jesse Cherian, owner of ST Fabrication Inc. near Tacoma, Wash., knows the importance of having access to credit. His company (a Bank of the West client) makes huge metal beams for commercial and industrial facilities, has grown through a combination of smart planning and investing.
“With fabrication, sometimes it might take 12 months on a job to find out really how well that job did. You might get a $1 million job, but it’s not until the end of the job and after everything’s paid that you really know how you did. As a consequence, you need to have some kind of cash buffer to be able to get through that. If you’re in a growth spurt and you’ve got six or seven of those jobs, you have to cash flow that as well. So I’m a believer in having credit lines available,” Cherian says.
Keeping smart growth in mind can help a manufacturer find the right path for the business. Once the decision is made to grow, developing a plan that lays out both the strategy for investing in the business and the strategy for funding growth can help position a company to take advantage of opportunities to expand.
Michelle Di Gangi is executive vice president of small- and mid-size enterprise banking at Bank of the West. She joined the firm in 2008. She graduated from UCLA with a BS in Psychology and MBA, as well as from USC with an MsEd in special education.