Government Shutdowns and the Manufacturing Industry, Industry Today

February 21, 2019

By Robert Nentwig, EVP & Chief Lending Officer (Commercial & Industrial), Boston Private and Robert Buffum Jr., SVP Chief Credit Officer, Boston Private

The government shutdown that began on December 22, 2018 and lasted a full 34 days was the longest in U.S. history. In addition to halting operations at several federal agencies and forcing some “essential” employees to work without pay for its duration, the shutdown also posed economic challenges to private sector businesses. According to a recent survey by payroll provider Paychex, 21 percent of business owners reported being directly affected by the shutdown, and 19 percent said it had a negative impact on their business outlook.

A government shutdown is a reminder that business owners should always be prepared for a potential slowdown or loss in revenue, whatever unexpected event it might be caused by. Read on for insights on how a shutdown might impact manufacturing businesses, as well as how to weather the storm and minimize the disruption to business as usual.

The shutdown effect: implications for manufacturing businesses

The effect of the recent government shutdown on businesses in the manufacturing sector varied according to the type of business and their affiliation with government entities.

Arguably the most significant consequence for manufacturers was loss of revenue earned by supplying goods or services to the government. Some vendors or contractors felt the sting less, for instance, manufacturers providing materials to the defense sector which continued to operate during the shutdown. But companies that manufacture and sell consumables to government facilities (think soap suppliers for federal offices) most likely experienced delays or losses to their expected revenue.

Due to the amount of capital equipment manufacturers must maintain and operate in order to keep their businesses running smoothly, delays in receivables can present cash flow problems. Fixed maintenance costs can’t necessarily be postponed while a manufacturer waits to be paid. For many business owners, these cash flow problems can have a multiplier effect as they contribute to increased stress and present an unwelcome distraction, taking the executive’s focus off of the day-to-day responsibilities of running and growing their businesses.

In addition to lost or delayed revenue, companies that rely on the services of government agencies — for things like the processing of visas for new hires from foreign countries — were impacted when those services were made unavailable. The Small Business Administration, which assists banks in lending to small businesses, stopped processing loan applications during the shutdown, temporarily cutting off those sources of financing. And while the IRS continued to function, individuals and entities that filed taxes in hopes of receiving refunds during that time period experienced delays. The government shutdown slowed many of the critical services that business owners rely on.

Three tips to prepare for and mitigate the effects of a government shutdown

Business owners’ hands might be tied when it comes to predicting or preventing government shutdowns or other unexpected events, but there’s one thing they can do: prepare. Taking the following measures can help make any manufacturing business more resistant to the adverse effects of an unexpected disruption.

1. Establish a financial cushion

Businesses in every sector of the economy should maintain reserve capital for unanticipated events. Not unlike the “rainy day fund” that conventional wisdom encourages individuals to keep in their personal savings accounts, having cash on hand is an often-overlooked key to scaling growth and weathering unpredictable competitive threats and economic cycles. Business owners should also work with their banks to explore options for access to credit when cash flow problems arise, such as securing a bridge loan or relaxing the terms of their line of credit to accommodate a possible delay in receivables.

2. Diversify your customers and suppliers

Diversification is a critical component to a healthy business — remember the old adage, “don’t put all your eggs in one basket.” Even if all of your business contracts come from government entities, try to diversify the work across governmental departments. If you’re a contractor dependent on business from the Department of Parks and Recreation, for example, you took a hit while it was closed during the shutdown and will want to avoid that situation if and when the next one occurs. As a general rule of thumb, keeping your largest customers to no more than 10-15 percent of annual revenues will help ensure adequate diversification and alleviate concentration risks.

The concept of diversification also applies to suppliers. Maybe your business wasn’t directly affected by the government shutdown, but if your primary supplier was, any shortages or delays experienced on their end could also cause problems for you. Sourcing materials or services from a variety of suppliers can help spread risk more evenly and reduce the chances of a disruption to your business. Keeping an open line of frequent communication with suppliers can help alert you to potential issues in time to alleviate them.

3. Build strong business relationships — especially with your bank

One of the most important business relationships to maintain is with your bank. In particular, it’s important to work with bankers who understand your business and industry, and who will serve as consultative partners to help you think through your business challenges. In the event of a government shutdown, a bad quarter, or another unanticipated incident that leads to a shortfall in working capital, you want to be working with a banker you’re comfortable reaching out to at the first sign of trouble, and who will help you address your concerns. If you view your bank as simply a supplier of credit and a place to deposit funds, you’re likely missing out on the level of counsel and service that can help you grow and maintain a healthy business.

Manufacturing companies can’t predict the next government shutdown or unforeseen scenario, but advanced planning, strategic selection of partners and a strong, consultative banking relationship can help to mitigate negative effects.

Government Shutdowns and the Manufacturing Industry, Industry TodayRob Nentwig is Executive Vice President and Chief Lending Officer for the Commercial & Industrial segment at Boston Private, a leading provider of fully integrated wealth management, trust and private banking services.

Government Shutdowns and the Manufacturing Industry, Industry TodayRobert Buffum Jr. is Senior Vice President, Chief Credit Officer in Commercial Lending at Boston Private.

Investments are not FDIC Insured, not guaranteed and may lose value. Member FDIC. Equal Housing Lender.

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