Spring 2006 issue of Horizons

INDUSTRY MANUFACTURING & DISTRIBUTION Driving Revenue Growth through Manufacturing Excellence

Mike W. Lewis, CPA Todd Pleimann, CPA

Obviously, high levels of profits, earnings and cash flows must be produced and sustained to produce top dollar. Economic factors have forced many companies into lower than expected (or preferred) levels of financial performance. In addition, manufacturing companies generally have hefty investments in fixed assets that can dramatically affect prof- itability and return on investment. It is increasingly important that companies monitor the existence of non-producing assets, as an inventory of unused equipment or machinery may seem worthless to the buyer. Turning these assets into cash may increase the strength of the company's balance sheet or provide investment dollars for key projects. Just as profits and earnings are important to receiving top dollar, market timing is critical to the exiting owner. The ideal time is when the company and its specific manufacturing industry are both performing at their best. The exit planning process will always keep the owner apprised of developments in its spe- cific industry in order to capitalize on the optimal selling time. When a third-party buyer reviews a manufacturing business, he/she must pay particular attention to the strength of the company's human capital. Human capital is a company's most important asset. Third-party buyers look for committed employees who focus on and embrace the company's long- term success. Without proper communication and employee development, the value of a manufacturing company can be severely damaged. In addition, buyers seek companies with strong management teams. In manufacturing, a potential purchaser wants to know that the management team responsible for the successful management of the operation and employees are sticking around. Without effective retention programs, how can a potential buyer be certain the management team will stay on during the acquisition and afterward? The exit planning process helps identify and create plans to hang on to the company's most important managers. These retention programs are designed to retain top talent, increase company value through specified performance objectives, recruit other star employees and eventually help them retire. Without locking in the star employees, the value of the business and the ability to sell it for top dollar are at a great disadvantage. Questions? Contact either Mike Lewis, Partner-in-Charge, Manufacturing and Distribution Services Group 314-290-3391 mike.lewis@rubinbrown.com or Todd Pleimann, Managing Partner - Kansas City office 913-491-4144 todd.pleimann@rubinbrown.com.

All manufacturers ask themselves, “Where can we reduce costs?” A company might reduce costs by substituting a less expensive raw material in its production process. This reduc- tion in cost could lead to increased margin on the product. That same substitution may also lead to less reliability or durability of the product, thereby causing a loss of revenue that may have a bigger impact on overall profitability. Most manufacturing improvement initiatives focus on reduc- ing inventory, lowering labor or raw material costs, and utiliz- ing assets more effectively. Viewing manufacturing as a growth engine, not just a cost center, entails understanding customer needs and redirecting manufacturing improvement initiatives in ways that can help sales and marketing units boost the top line. This approach is sometimes difficult to implement because of conflicts between departments or a prevailing view that manufacturing can only generate costs. Most companies can cut manufacturing costs. Most compa- nies also can boost revenue through cost reduction driven ini- tiatives. But few companies focus on both. Companies that focus their manufacturing approach to meet customer demands can benefit from both top-line growth and cost reduction. A company must understand the revenue and prof- it impact of its cost reduction initiatives. • Increasing product offerings by adding flexibility to the man- ufacturing process • Exploring ways manufacturing can help the company differ- entiate its product • Aligning manufacturing with sales and marketing plans • Increasing manufacturing's role in the strategic process Clearly, changing the way you view your manufacturing process can be difficult. The use of traditional metrics and incentives that focus on reducing costs, rather than encour- aging revenue growth, can be counterproductive. Overcoming these difficulties can stretch cost-cutting initia- tives into significant improvements in both the top and bottom lines. Exiting Your Manufacturing Business Manufacturing companies are valued on existing customer relationships, quality and commitment of human capital, strength of the management team, history of profitability, and other financial measures. Items unique to the mid-size man- ufacturing business, including niche markets, key projects and account base, make an effective exit plan especially important. Companies can achieve revenue growth by:

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