Using Financial Hygiene to Grow During Lean Times

Those who reduce costs in the wrong places will find themselves unprepared for the recovery.

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As manufacturers dig out of the COVID-19 rubble, they are taking a hard look at their profit-and-loss statements and seeking cost savings wherever they can find them. While some cuts may be unavoidable, business leaders must be strategic about where they cut. Those who reduce costs in the wrong places will find themselves unprepared for the recovery.

For example, some companies trim sales and marketing activities in search of quick cost savings. But robust sales and marketing efforts help companies attract and retain customers. Similarly, deep cuts to IT staff can leave companies vulnerable to not only technology failures but also security breaches. 

Instead of going after what appears to be low-hanging fruit, manufacturing business leaders need to engage in a thorough financial hygiene exercise to identify hidden savings throughout their operations. At the same time, they must seek to preserve growth-generating activities and even find opportunities to strategically invest in tools that will enable long-term performance gains. A financial hygiene exercise requires time and commitment. But if done well, it can make a business more agile and ready to capitalize quickly on market opportunities.

Uncover Hidden Savings 

To start, manufacturers need to scrutinize their biggest costs and look for immediate savings. Many costs are more negotiable than most business leaders think. For instance, manufacturers may be able to secure better freight rates from existing or new providers. Utility companies will sometimes work with businesses to reduce energy costs. And health insurance is a high-priced item that business leaders should be reviewing on a regular basis, looking for ways to save without diminishing the quality of the coverage their employees receive. 

One area that many manufacturing leaders overlook is property taxes. Every year, and especially this year, when many companies were severely impacted by the pandemic, leaders should appeal their property taxes. 

If the value of the business decreases, so does the value of the real estate. Unfortunately, many manufacturing businesses have struggled during this time. So, if a business leader can prove that the pandemic negatively impacted his business, he can credibly claim that the value of its property decreased and argue for a reduction in property taxes. 

It’s important to build a strong case. Business leaders must understand and be able to articulate clearly and concisely how the pandemic impacted their sales and profitability. Then, analyze the sales prices of similar properties in the area to identify any decline in fair-market values. Look at what neighboring businesses pay in property taxes. There shouldn’t be notable differences in the comparable property assessments on a per-unit basis. Differences become the basis for appeal. Check the county’s property records to ensure that the assessment does not include retired or unused property or items rightly considered non-taxable equipment.  

This effort to contest property taxes can result in significant savings for a manufacturer. Leaders can then use these savings to protect crucial areas of the business from cuts. 

Strategic Investments 

As manufacturing business leaders work to conserve cash and keep the lights on during this difficult time, they must also look to put in place tools that will help them thrive, when the economy improves. It seems counterintuitive to consider spending money during this time. But, if a company can make modest investments that put it in a better competitive position, it should make those investments. The proactive companies will be the ones poised to thrive in a recovery. 

Fortunately, there has been a great democratization in technology as digital transformation has accelerated. Today, advanced technology is more available to small and mid-size manufacturers than ever before.

For example, manufacturers may be able to reduce manual, rote tasks with robotic process automation bots that speed processes and improve accuracy. Additionally, app-building tools on the market allow non-programmers to build custom apps that can help boost plant-floor productivity and quality assurance, which, in turn, benefits customers.

Manufacturers are navigating a uniquely challenging time. Unfortunately, cost reductions are unavoidable for many companies. By thoroughly scrutinizing business costs and taking a strategic approach to cuts, manufacturers can uncover cost savings, protect growth efforts and identify opportunities for long-term improvement.

Jerry Murphy, CPA, CMA, CGMA, is partner-in-charge of Sikich’s manufacturing and distribution services team.

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