To grow, manufacturers often focus on the top line of their income statement (revenue). But boosting profits is the key to long-term sustainable growth. In today’s competitive marketplace, owners must review their operations every year and ask: What can we do to make more money from each direct labor hour or dollar invested in machinery? Here are five strategies to help you enhance profits and maximize the value of your business.
1. Cut overhead costs
Boosting profits doesn’t always mean plant layoffs. Often cuts can be made in overhead without affecting employee morale.
Examples of overhead costs include utilities, rent, marketing and customer service. For example, it might be more cost effective to outsource customer service or shift marketing efforts from direct mail to online or social media campaigns.
Not sure where inefficiencies exist? Ask people inside your organization. They know how your business operates and see inefficiencies on a daily basis. Plus, employees who help devise cost cutting measures tend to be more vested in seeing them through.
2. Renegotiate contracts
Manufacturers typically have many contracts with suppliers, lenders, lessors and insurance providers. But they may underestimate their negotiating power in these contractual relationships. Often, you needn’t wait until contracts expire to revise the terms to be more favorable to your business.
Take insurance policies as an example. There are many insurance carriers and types of coverage. An insurance broker can help “shop” different insurance companies and evaluate the options so you’re not paying for nonessential coverage or leaving gaps in your coverage. Look beyond business property and liability products and evaluate cybersecurity and employee health care policies. Today, insurance providers may offer more cost-effective alternatives and bundling options compared to a decade ago.
Likewise, evaluate your loan agreements and research what competitors offer. You may be able to negotiate more favorable terms with your lender(s) and eliminate onerous loan covenants that may be holding back your expansion plans.
3. Upgrade equipment
Every machine in your plant has a useful life that may expire while the asset is still in production. That is, old equipment may be slow, break down frequently and use excessive amounts of electricity and labor.
Evaluate each fixed asset, especially those that are fully depreciated, and assess how next-generation technology might affect productivity. In some cases, labor-intensive equipment can be retired and replaced with machines equipped with artificial intelligence (AI). In other cases, energy-efficient “green” machines may be able to lower electricity bills and reduce materials waste.
4. “Upgrade” employees
Are the skills of your workers sufficient? Some employees may benefit from additional training courses to improve their technology skills and teach them how to use new equipment or production techniques. Improvements in skills and job satisfaction can, in turn, lead to higher productivity.
In other cases, you might consider new hires to infuse your organization with fresh ideas. For example, a new plant manager might have novel ideas for how to reorganize the production line or organize the warehouse to reduce queue time and improve productivity. Or a new controller might recommend accounting or inventory tracking software that reduces overhead costs and administrative headaches.
5. Revise business structures
Review your business structures to determine whether all the entities have a purpose. In some cases, you may decide to eliminate a business structure to reduce administrative costs and complexity.
On the flip side, some companies are too simple. Assess whether any business lines or assets expose the rest of the organization to unnecessary risks. You may decide to add a business structure to safeguard your core operations from risk. For example, if your business owns real estate, you might want to carve that out into a separate business entity in case a legal claim is made against the property — or to facilitate estate planning.
When it comes to profits, manufacturers can’t afford to rest on their laurels. Owners and management must always look for ways to operate more efficiently. Contact your financial advisors for best practices to help boost profits in 2019 and beyond.
A closer look: Eye on taxes
The Tax Cuts and Jobs Act (TCJA) introduced several tax-saving opportunities for businesses. In particular, privately held manufacturers may benefit from the following provisions:
- Flat 21% tax rate for C corporations,
- 20% qualified business income deduction for S corporations, partnerships and other so-called “pass-through” entities,
- Expanded Section 179 and bonus depreciation deductions,
- Expanded eligibility for simplified tax accounting methods, such as cash-basis accounting and simplified inventory accounting methods, and
- Approximately doubled lifetime gift and estate tax exemption and generation-skipping transfer (GST) tax exemption.
For 2019, the lifetime and GST tax exemptions are $11.4 million (effectively $22.8 million for married couples). This amount will be adjusted annually for inflation through 2025. But these high exemptions will expire in 2026, unless Congress extends them. They provide a limited-time opportunity for private business owners to transfer business interests and wealth across generations tax-free. Contact us for more information.