PART 2 – Making Decisions Under Duress
As our economy begins to open back up after COVID19, you need to think through how reductions to your manufacturing capacity impact your ability to reduce expenses, manage cash flow and be profitable in the long term.
You see, the problem isn’t as simple as your governor and others make it out to be: “We’ll start at 50% capacity and increase as we go”.
The real problem is that when you begin manufacturing operations again, you’re going to have close to 100% of your Operating Expense going out and yet only 50% of your Throughput-margin coming in.
In some cases, a business might be better shutdown rather than operating at 50% capacity – especially if you’re an owner faced with mortgaging personal assets to fund this period of loss.
And let’s not forget, there’s likely not a 1 for 1 trade-off in terms of employees and the Throughput-margin that your company can generate.
As an example, if you’re building an assembly with welded and machined parts, you might have previously welded and machined the components on Monday and assembled on Tuesday. Now, you may weld on Monday, machine on Tuesday, and assemble on Wednesday.
All of this assumes that you can get each step done in one day a week. The story only gets worse if that’s not possible.
This is bad for several reasons:
- You have higher levels of WIP for longer periods of time.
- It takes longer to get paid on jobs in your shop.
- Due date performance levels will suffer.
- New jobs that you’re quoting will likely have longer lead-times, that customer’s may not accept.
The situation is NOT GOOD.
It doesn’t take a CPA to figure out that if half (or less than half) of your money is coming in with 100% of your Operating Expense going out your business will not be profitable, nor will it be able to cash flow.
That’s why we’ve made a video to guide you through alternatives that you might consider in managing your capacity and pricing during these COVID19 times.
The video is called “Making Decisions Under Duress: Capacity Management and Pricing Strategy”.
At the end, we offer the opportunity to request a free, no-obligation financial checkup, should you want someone to talk to about your unique situation.
We hope you’re staying safe and doing well. But hope is not a strategy.
Let’s determine what you can DO now! –> FREE financial and cash management checkup