The manufacturing sector has been breathing a collective sigh of relief in recent months, as industry data shows the upward trend of American manufacturing output seems sustainable for the foreseeable future.
In addition to continuing to fill as many orders as possible, manufacturers should reassess the following business strategies in light of the improving economic outlook.
Renegotiate loans and leases
Interest rates are at their lowest levels in a generation. Is your firm taking advantage? Chances are, the business rationale for leasing or financing equipment or facilities has changed in the past one or two years, thanks to the improving economy. This is why it’s important to review lease and loan documents to see if lower rates are available or a different financing method might better fit your current situation.
For example, let’s say in 2008 you needed a new forklift for your plant and decided that a five-year lease made the most sense for your business given the then-current economic conditions. The lease kept your fixed costs low and required less up-front money than a traditional loan. Fast forward five years: Your sales are up, interest rates are low and signing another lease may or may not be prudent, depending on your financial situation.
Reinvest in human resources and facilities
Many manufacturers that are emerging stronger from the economic downturn instituted numerous cost-cutting strategies during the lean times to stay competitive. Popular strategies included increasing automation, freezing payroll, and halting building projects and renovation — any action that allowed the company to do more with less.
But the same strategies that helped you during bad times may hurt you during better times. With the economy turning around, quality may suffer if you’re not attracting and retaining the best and brightest talent. In addition, your output may not be as efficient as it could be with the right technology or plant upgrades.
That’s why human resource investments should be assessed again as the economy continues to improve. Continuing education, management training, tuition reimbursement and other HR outlays that were standard in many industries 10 years ago are largely gone now. Consider reinstituting these employee benefits, which can help attract and keep talent.
An improving economy also means it’s time to revisit whether your current location and facilities align with your current business strategy. After perhaps languishing for years, your current warehouse or plant may be too small, too big or too outdated for your current operations or workforce. Plus, there are deals to be had with the ongoing commercial real estate glut.
Retool pricing, marketing and PR
As the economy went sour in 2008, manufacturers lowered their prices and shrank margins to retain top customers, attract new ones and keep assembly lines rolling. That downward pressure on manufacturing prices now appears to be lifting, so it’s important to review what you’re charging your customers to see if your current pricing is appropriate for the rebounding economy.
Similarly, when the economy took a nosedive five years ago, many managers scaled back their spending on marketing and public relations (PR) because of return on investment (ROI) concerns. Increasing these investments as the economy improves can have a big impact on sales, but the marketing and PR world has changed dramatically since 2008. Social media, content automation, search engine analytics and other now-standard tools make it easier for B2B firms to determine ROI for a particular marketing tactic such as an e-mail-based newsletter, a Twitter account or a white paper.
As with any other major business decision, it’s important to develop and have a well-devised plan in place. So work with your sales and marketing teams to determine if any of these new marketing and PR tools are a good fit for your business and its customers.
Even with manufacturing indicators (such as the PMI) pointing up, it’s important to balance this information with other, general economic data before taking action. There are many outside factors, such as new tax laws and the unemployment rate, that can affect your business. Talk to your business advisor to determine which strategies are appropriate for your manufacturing company.
Sidebar: Higher expensing limits, bonus depreciation extended
As part of the American Taxpayer Relief Act of 2012, Congress extended two depreciation-related tax incentives through 2013 that can provide significant savings to manufacturers and other businesses that invest in equipment and certain other assets:
1. Higher Section 179 expensing limit of $500,000 and phaseout threshold of $2 million. Sec. 179 expensing allows you to deduct the cost of qualifying asset purchases in the current tax year rather than depreciating them over a period of years. The deduction is reduced $1 for each $1 of expenses exceeding the threshold. Without the extension, the limits would have dropped to $25,000 and $200,000, respectively.
2. Bonus depreciation. It allows businesses to deduct 50% of the cost of a qualifying asset in the current tax year.
In some cases, a manufacturer can benefit from both of these depreciation-related breaks. For example, buying a $650,000 piece of equipment could give your company a $500,000 Sec. 179 expensing deduction the first year, plus a bonus depreciation deduction of 50% of the remaining $150,000 cost, or $75,000. In addition, you could take the normal first-year depreciation deduction of $15,000 (20% a year for five years). So the first-year deduction would be $590,000.
If your company’s tax rate was 36%, the tax savings would be $212,400 ($590,000 × 36%). Subtract that savings from the original equipment cost of $650,000, and the net cost to the company would be only $437,600.
Keep in mind that both the higher Sec. 179 expensing limits and bonus depreciation are generally scheduled to expire Dec. 31, 2013. So if you’re considering equipment investments, you may want to make them this year to ensure you can take advantage of one or both of these breaks. But many additional rules apply, so first consult your tax advisor.
Please contact Dennis McLaughlin at [email protected] with any questions on this topic.