Manufacturers should take proactive steps to manage cash flow and create efficiencies in the wake of COVID-19.
By David Kloess, Partner at Bennett Thrasher
The COVID-19 pandemic is posing challenges to the manufacturing industry that no company could anticipate. Every business owner is concerned about the future of his/her business and what the “new normal” will look like. Will I need to significantly redesign processes and facilities to maintain social distancing and proper sterilization? Will consumer demand ever return to pre-pandemic levels? What does this crisis mean for the future of global supply chains? The full impact of the virus has yet to be seen and no one can predict the “new normal.”
But for those companies willing to rise to the challenge, this crisis also creates opportunities to innovate. Nothing is truer than necessity being the mother of invention, and making meaningful changes to forecasting, justifying costs and redefining processes could determine the difference between a business that makes it through the COVID-19 crisis and one that doesn’t.
These four tips can help manufacturing companies navigate these unprecedented times by turning challenges into opportunities.
Utilize government stimulus programs to free up cash flow.
Businesses with 500 or fewer employees are eligible to apply for the SBA’s Paycheck Protection Program (PPP), which originally authorized up to $349 billion in up to $10 million of forgivable loans and was recently replenished by an additional $310 billion in funding for these businesses to pay their employees. Loans will be forgiven based upon the eight-week period after funding of “incurred and paid” payroll costs, rent, mortgage interest and utilities, with 25% of the total spend being for payroll costs. The unforgiven amount of the loan will carry 1% with a two-year term, including payment deferrals for six months.
If your company exceeds the size limits imposed by the PPP, you could be eligible for the Federal Reserve’s Main Street Lending Program, provided your business employs fewer than 10,000 people and generates an annual revenue of less than $2.5 billion. Companies that have already applied to the PPP are also eligible for loans through this program. Once your company gets its loan, the Federal Reserve will buy up to 95% of the loan from the bank, leaving just 5% with the bank that originated the loan. The term of these loans is four years with interest rates between 2.5% and 4% ,and depending on whether the loan is considered new or additional to existing loans will be up to $25 million or $150 million ($1 million minimum) based on EBITDA metrics. These loans cannot be used to pay off existing debt. Additionally, these loans are subject to a “reasonable efforts” requirement. Although vague, there is a general presumption of this requirement being to maintain at least 90% of your workforce through September 30, 2020.
Additionally, the IRS now allows for the carryback of net operating losses to prior years to obtain cash, which could benefit from pre-2018 tax rates. Also, you could benefit from favorable changes made to tax credits such as the acceleration of AMT credits, the new mandatory sick leave credit and expansion of family leave credits.
Predict and drive results with effective financial planning and analysis.
Few, if any, companies can grow profitably and sustainably without careful financial planning and cash flow management, even in times of prosperity. In times of global crisis, effective FP&A can be crucial to survival.
Dedicate or hire a team of financial analysts to extensively analyze and evaluate the entirety of your company’s financial activities. It’s critical to create a rolling eight- to 13-week cash flow projection, and there are tools and modeling software that can help.
In general, responsibilities of FP&A include:
- Creating and constantly updating financial models and forecasts.
- Establishing accountability of spending and resource needs.
- Challenging whether certain functions can be outsourced.
- Providing deeper understanding of product pricing and costs.
- Determining which products or product lines generate the largest portion of net profit, and with that, predicting what customer need and demand will look like post-COVID 19.
- Coordinating with customers and vendors to determine needs and manage supply chain interruptions.
Use the insights uncovered by FP&A to create new efficiencies.
If there was ever a time to reinvent your business by taking a hard and honest look at what works and what doesn’t, it’s now. What does this mean? It means addressing personnel management issues you’ve been avoiding. If FP&A uncovers an interruption to your supply chain, it means finding alternative sources in the U.S. It could mean renegotiating pricing and contract terms, drilling down on the spend of the business, considering outsourcing of certain processes and harnessing your purchasing power. With effective FP&A to back your decisions, you can use this time to create new efficiencies for your plant that result in critical cost savings.
Consider implementing variable compensation.
Variable compensation, also known as incentive compensation, is primarily used to promote efficiency and productivity. This is a great alternative to laying off a portion of your workforce. For example, instead of cutting 10% of your employees, implement a 10% reduction in pay for all, with the addition of a rewards program based on performance. This is a powerful way to build a sense of loyalty and ownership throughout the organization.
If decreasing pay is necessary, doing so with the promise of rewarding high performers can preserve morale. Plus, research suggests that rewarding high performers correlates strongly to greater overall performance, creating employees who start to feel and act more like owners.
The coronavirus crisis has created unprecedented challenges for the manufacturing industry, but also, like any crisis, it presents an opportunity to diversity, improve efficiencies and prepare for the next disruption. By following these tips, manufacturers can rise to the challenge and weather this storm.
David H. Kloess is a partner in Bennett Thrasher’s Financial Reporting and Assurance department. David has over thirty years of experience serving the financial reporting, accounting and related advisory needs of both private and public companies, with experience spanning many industries including manufacturing/distribution, technology, construction, restaurants/franchise and real estate.