Interest rates cloud planning for 2020

Author:
Publish date:

Business owners are getting jittery about global recession.

The first shoe fell last December when Fox News, The New York Times and other major outlets ran headlines similar to this one that appeared in Business Insider: “82 percent of CFOs expecting a recession by the end of 2020”. The second shoe dropped when major financial publications ran headlines in mid-August about instability in the stock markets, among other signs of economic weakness. The Dow dropped more than 800 points (3 percent) in a single day, there was negative growth for the second quarter in both the British and German economies (the two largest in Europe), and China reported a 17-year low in the growth of its industrial output.

And while a few analysts downplayed the second yield curve inversion in a year or so (where the return on a 10-year Treasury note fell below the two-year), the vast majority saw this as a definitive prediction of imminent recession. This was the second time a yield curve had taken that road recently. Twice in less than nine months is more than a hiccup, because the past seven recessions were all preceded by exactly this inversion.

So, when it comes to financial planning for 2020, the overriding concern is going to be interest rates, and their effect on the availability of credit. Higher interest rates and tighter credit will impact woodshop sales, because new home construction and remodeling rely heavily on interest rates. Custom casework suffers first, especially on the high end. And in addition to the housing market, when retail sales contract states and municipalities garner fewer taxes and invest less in infrastructure such as schools. That means fewer institutional casework sales.

The keys to preparing for a recession are to retain as much cash as possible and to pay off – or at least pay down – any high interest debt. There’s still a little time left to do that. Variable rate loans should be converted to fixed rate ones, if a banker can be so persuaded.

Invest in equipment?

Curiously, this may actually be an opportune time to invest in major equipment. There’s a fine line here, and one that requires a good bean-counter’s advice.

If a downturn is protracted, inefficient shops tend to close their doors after about a year. A shop that can rein in payroll while maintaining production levels could be in a good position to survive a downturn, and perhaps even thrive. But the shop needs to be in sound enough financial shape to support an equipment purchase. It must have reliable cashflow and own a healthy debt to assets ratio before and after the purchase.

Some upgrades have a larger impact. For example, automating processes within the production cycle, especially in terms of material handling (for example, CNC loading and unloading) can have a significant impact on cost per unit.

Upgrading elements of a CNC (for example, faster motors, a larger spindle, an updated control panel, a better tool-changer and adding a vacuum bed) instead of replacing the entire machine can be a thrifty way to increase productivity.

Small- and medium-sized shops might be surprised at how affordable collaborative robots are. These are essentially robotic arms that can sense the presence of a human and work safely beside a woodworker within a single workstation. They can pick up and place parts, spray finish, sand and do a host of mundane, repetitive tasks that free up employees to do more demanding jobs. The investment here starts at about the cost of paying an employee for six months, so the return on investment can be quite rapid.

One other way to curb payroll is to take a long, hard look at outsourcing. As every shop owner knows, we can buy almost any component – cases, doors, drawers, accents, moldings – and have them shipped to the shop or the worksite. RTA (ready to assemble) fittings have come a long way in the past five or so years. It may be time to do a spreadsheet.

Depending on the level of outsourcing, a woodshop may even find itself in the position of being able to reduce its machine inventory and dedicate some of the cost savings toward advertising. Keep in mind Bruce Barton’s adage: “In good times, people want to advertise; in bad times, they have to”. Barton (1886-1967) was an ad executive and Republican congressman who represented New York in the years right before World War II. He wrote about the necessity to advertise during the Great Depression. He was right.

Insurance issues

The whole idea of building up cash reserves before a downturn in the economy is to be able to ride out the bumps. If sales are happening but payments are slow arriving, there can be some lean months. These don’t seem so harsh when a business has a little cash available.

While small bumps in cashflow can be managed, a large financial loss in hard times can be fatal. Accidents happen and having a customer slip on the ice outside the showroom, or a cabinet fall off the wall and injure a client, or perhaps a fire in the spray booth – such events can be, and often are terminal events for a business. So, it’s a good idea to review the business’s insurance policies periodically.

Having a little cash tucked away can really help here. Insurance tends to be more expensive when it comes to initial coverage, and less so in the umbrella. That is, a policy may have significantly higher coverage and yet cost less than another if the deductibles (the part of a claim that the shop owner covers) are a little higher. There can be quite significant differences in the premium when the deductible is raised even a little bit, and this is an area well worth exploring with an insurance agent. If a shop has some cash reserves, the exposure that comes with higher deductibles is obviously less than it would be if the business is strapped for cash.

ERP software

Affordable enterprise resource planning (ERP) software is a relatively new tool for small to midsize shops. It opens up the potential to use data across all operations to create a more efficient and well-run business. What it essentially does is use a single database for all of the information being generated within the different areas of the business such as production, sales, inventory, office staff, vehicles – anything that can be assigned a number.

Some ERP software is specifically designed for cabinet or furniture businesses, while other programs are more generic and require a little adaptation. Some works with the shop’s existing CAD design program and can bring together diverse facets such as sheet stock inventory and optimizing for the CNC. It can, for example, help a salesperson to steer customers in a direction that uses more of the inventory and resources the shop already owns, rather than having to buy case quantities of product for a custom solution that may not get entirely used up in the course of a single job. Or it can let a project manager know that more drawer slides have been ordered and even though they’re not logged into inventory yet, they will be on site before the job needs them. That way, he/she doesn’t order parts or components that will tie up cash by sitting on a shelf. There are shades of lean manufacturing’s just-in-time philosophy here, and in fact ERP and lean manufacturing are very compatible concepts.

ERP software can usually grant different levels of access to different employees, depending on their needs. That way, everyone doesn’t need to be trained in every aspect of the program, and unqualified people are not able to make binding decisions that are beyond their purview.

Most ERP software can be either network or cloud-based, so security and availability issues can be addressed appropriately. For example, an installer with the right level of access can use a phone on the jobsite to check where a missing part might be, while a CEO can gather all the numbers she needs while sitting in an annual general meeting, even if there’s a power outage at the office and the computers are down.

There’s a general feeling that low-end ERP software can actually end up costing more than a better program because of the time involved in automating functions or in working around functions that are missing. An ERP package needs to be able to grow with the business, and the more data it processes (that is, the more areas of the business that are included), the more useful and accurate it will be. It’s a good idea to have one or two people (preferably the IT team) be in charge of an ERP program. As with any management tool, the fewer people who can change the structure, the better. But each department also needs good representation because these kinds of management programs can become lopsided if they aren’t democratic. And department heads can help tweak the program by offering feedback. This allows the ERP data to become more customized for a particular woodshop, rather than remaining industry generic.

However, many businesses have invested heavily in ERP software only to discover that it requires an awful lot of time and effort to set up and maintain. If the program isn’t well-suited to the organization, or is difficult to use, this can be an expensive investment in a pipe dream.

Shop carefully. 

This article originally appeared in the October 2019 issue.

Related Articles