Every metalcasting operation experiences slow periods. Regardless of whether those inevitable slow periods result from economic downturns, seasonal slumps, or other factors beyond the control of the business owner or manager, the key to survival is understanding why things are slow — and how to correct them.
Just as many experts differ whether we are in, have been in, or about to enter into a recession, some foundry owners and operators see a promising year ahead while others are struggling to survive. Fortunately, a number of useful strategies can benefit all diecasting and foundry businesses, those impacted by the U.S. economy, the local economy, (global) competition – as well as those that are not affected at all.
One such strategy, diversifying business risk, means more than spreading out sales. Jones Company, for instance, sells both caskets and bulletproof vests — perhaps the ultimate in diversification. There is a steady market for caskets while the sales of bulletproof vests, rises and falls with federal law-enforcement funds and the crime rate.
Obviously, not every foundry or diecasting business can diversify into other fields, but very often a diversification into a niche market within your own industry will prove profitable. Creating a market where you have little or no competition, below the radar of competitors can be quite rewarding.
Continuing to manufacture an odd size, color, etc., discontinued by other manufacturers is not an automatic guarantee of success, but the investment to do so may be minimal and the risk may be low — both of which are important factors to economic survival.
Pointed toward profits
To keep the metalcasting operation pointed toward profits even in slow periods, the owner/manager must be well informed about the business. One invaluable tool, the profit and loss (P&L) statement is one of the most important indicators of a foundry’s worth and health. Properly prepared, the P&L statement shows the profit and loss for each of the business’s products, product lines, services or profit centers, as well as the profit and loss of the entire business.
Comparison is the key to using a P&L statement. Obviously, no metalcaster should look at only a single month’s sales or only at the operation’s profit picture. By carefully analyzing the historic trends of your business, as shown in your records for the past five years, you can forecast for the year ahead. Using historic figures and forecasting sales, a budget can be developed that will determine the health of your foundry or diecasting business, especially during those inevitable slow periods. Surviving slow periods often means cutting costs. Profiting from slow periods means cutting nonessential costs and reducing other costs, without impairing the operation of the foundry business. Consider financing costs, for example.
Renegotiating the interest paid on borrowed money is one strategy for surviving the economy. In some cases, borrowing money from the business or from the operation’s owners might slash borrowing costs. Remember, though, there is a cost associated with money whether it is the business’s or the owner’s own money, or a lender’s funds.
The “cost” of money is the amount of interest paid on borrowed money or the “lost opportunity” cost of the funds borrowed from the owner or taken from the business. That lost opportunity cost can be best described as the amount the business or the owners might have earned from investing or otherwise employing those funds. A foundry owner whose investments yield a 10% return each year would be foolish to use those funds to refinance the mortgage on the business building, a mortgage on which the business is paying an interest rate of only three percent.
During seasonal highs and lows, many metalcasting businesses see their cash balances fluctuate widely. The budget prepared for your operation makes it possible to shop effectively for economical financing well before the money is needed, or before it becomes a question of borrowing at any price just to survive. A guaranteed line of credit is one attractive option.
With an established line of credit, a bank agrees to lend to the metalcaster an amount of money, up to a certain limit, on an “as needed” basis. Interest is paid only on those funds that are actually borrowed, although most banks charge a minimal monthly fee for earmarking funds for your operation’s possible future use.
One of the largest expenses in any metalcasting business is labor. Because frequently there is close contact between owners and or managers with the employees, some smaller foundry owners/managers ignore direct and indirect labor costs. They may think of these costs in terms of the individuals they represent, rather than how the costs influence profits in terms of dollars and cents.
Thanks to sales forecasts, metalcasters know when to expect seasonal slowdowns. Why not encourage employees to take vacations during that period when their services may not be needed? This policy will not actually cut costs, but it should help maximize the effectiveness of the workforce and ensure that those workers are available when sales eventually increase.
In general, there are three ways by which every metalcaster can increase sales:
1) Find new customers;
2) Increase the average transaction; or
3) Give your customers more opportunities to buy more frequently — that often means a “sale.”
Yes a sale. Whether a reduced bid, lowered cost for a staple product, or a “sale” such as offered by many retailers, the fastest and easiest way any foundry can boost sales, draw customers in, and increase income in slow periods is a “sale.” Remember, however, marking down the price of a product or service without knowing its cost (both direct and overhead or indirect costs) will only make tough times less profitable.
By evaluating and reducing expenses and increasing sales, surviving — and profiting — in our current economic climate is both possible and feasible. Regardless of whether the slow period results from the economy, from competition, or from other sources outside the control of the business owner or manager, it is never too late to employ slow period survival strategies in your foundry business.