In Part I of this series, we discussed the importance of three P&L categories, i.e., cash flow vs. debt payments, revenue and earnings trends, and diversification of revenue. As we delve further into how bank loans are approved in today’s environment for the manufacturing and wholesale distribution sectors, we will mine a few more nuggets that should always be kept top of mind.
Even if you have no immediate plans to borrow, you never know when that one, great opportunity may arise. If your company is not in tip-top financial shape on that day, your ship might sail without you, and I don’t want that to happen.
Industry outlook, product demand
First, the good news. If you are a manufacturer or wholesale distributor, you are in industries that are generally in favor with banks. That is to say that banks have certain businesses that they want to avoid due to historical loan performance results, and you are less likely than most to be in one of them. Obviously, some sub-sectors are exceptions, depending on the consistency of product demand and other factors, so this is not an absolute.
On the other hand, unless you are involved in the manufacture or distribution of staple goods, your business is probably subject to cyclical factors, and lenders are acutely aware of them. Bankers will be reticent to lend to you if they are unconvinced that your industry is stable and that your products have ongoing appeal.
Perhaps the most unforgiving of these cyclical factors is economic obsolescence due to rapidly changing technology (think Kodak film, newspapers, and more recently, the desktop computer. Or anyone who sells products from a store that are also sold online by Amazon). Elsewhere, competitors that gain huge cost advantages from foreign outsourcing are always possible threats to steal your clients. A more certain and predictable form of cyclicality is the normal economic business cycle, or recession followed by recovery.
So, you may be asking, “what can be done about these circumstances beyond my control?” Very little or nothing. But you can take measures within your own company to counter the effects of these changes, and maybe even find a way to create an advantage.
If your products are prone to rapid economic obsolescence (disruptive technology), it is imperative that you invest in R&D to stay on top of the technology curve and bring new products to market before your competitors do. And speaking of competitors, it has been oft said that you should keep your friends close and your enemies closer. Knowing what your competition is up to can serve as the canary in the coal mine for changing market trends.
Talking to your customers about their product needs and preferences is also a great way to develop leading indicators pointing to inevitable market changes.
But what can be done about an economic downturn? In a word, “plan” for it, because it is coming. Not a question of if, only when. The advantage always goes to those who are prepared. And your lender will notice if you have an eye on the future.
Ideally, you would have different product offerings being sold to different industries, customer segments, and geographies to minimize the impact of a downturn that unequally affects our economy. Better still if you offer products that are cyclical and others that are counter-cyclical (products that increase in demand when the overall economy is tanking). It will be well worth your time and effort to scrutinize your product lines to determine what it would take to achieve this type of balance. Lenders love consistency and predictability of financial results. And so do shareholders.
If you can demonstrate financial resilience during a flagging economy, or at least have a credible plan to do so, you will have earned the respect of your lender, and the envy of your competitors. Change always presents opportunity as well as misfortune. With proper planning and access to capital, your company can flourish during virtually any economic conditions. We will explore this latter concept in more depth in a future series of articles.
If you own a manufacturing or wholesale distribution company with annual revenues of $5 to $50 million and want to improve your results in any of the areas discussed above, please call 704-575-5809 or email jchristian@trinitas-consulting.com for a complimentary Profit Optimization Session.
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