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Best Metrics: Welcome to the Best Metrics podcast. Each episode, we meet with industry experts to discuss how they evaluate financial statements, what metrics they commonly use, and how their clients have improved. We'll also gather suggestions of how you can incorporate the same insights and processes into your own practice. Thanks for listening and enjoy this episode.
Glenn Dunlap: Hello and welcome to Best Metrics. I'm your host, Glenn [00:00:30] Dunlap, and today we're going to discuss the best metrics for manufacturing companies. And I'm excited to introduce today's industry expert Leslie Boyd. Leslie is a principal at Kla's Manufacturing Industry Group and leader of the manufacturing industry for the Indianapolis office, which is also my hometown. She has more than 15 years of experience in public accounting, specializing in tax services for multi-state and multinational corporations s corporations and partnerships. She's also significant experience with tax preparation and documentation of uncertain tax [00:01:00] issues and positions. Leslie is also experienced working with companies of tax structuring of M&A transactions. Definitely an area that we'll be talking about and today and where best metrics are used, for sure. And Leslie is a speaker on several tax topics, including their firm's tax advisor update, tax merger and acquisition topics, and tax credit and incentive areas. So welcome to the show, Leslie.
Leslie Boyd: It is fantastic to be here with you. Thank you so much for having me.
Glenn Dunlap: Yeah, excited about it. I'm excited. I was, um, looking at, uh, stuff. You know, I was pulling some [00:01:30] things from the web to to prep for the show, and I was noticing some of the metrics that you guys have about your firm on your website. So I pulled some of these stats. So, uh, uh, some of these may be outdated, but, you know, certainly CLA is a top ten firm. Um, the the website says you have 130 locations. Is that right? You still have 130 or more.
Leslie Boyd: We do have over 130 locations now. And that is absolutely a strategy that we have hung on to. While a lot of people have pulled back during Covid, because one of our key [00:02:00] strategies is to really be in the community, and it's really difficult to do that and be better together. If you pull back from being physically present in locations. Yeah, no, that's great.
Glenn Dunlap: 8500 professionals, is that right? I mean, that's crazy.
Leslie Boyd: It's amazing.
Glenn Dunlap: Yeah, it is. And, uh, you know, and then how many do you have any sense of how how many clients you're serving, how many business clients we.
Leslie Boyd: Serve over 200,000 clients.
Glenn Dunlap: Goodness gracious. That's, uh.
Leslie Boyd: And over 10,000 manufacturing [00:02:30] companies.
Glenn Dunlap: Okay, so that was my next question. So let's break that down on the manufacturing side. Tell us about, uh, about, uh, the manufacturing practice in your role at CLA.
Leslie Boyd: I would love to do that. And, Glenn, I just have to ask you, do you know that CPAs. We are kind of a little bit like attorneys.
Glenn Dunlap: Cpus are a little okay. Yeah, maybe you would have guessed that, but let me tell me. Tell me how.
Leslie Boyd: So before I begin and dive in, I have to do a quick disclaimer. So I want to just say that my comments are intended for [00:03:00] general information and they don't constitute financial or legal advice. And so, you know, after getting past that, I think we should absolutely just dive in.
Glenn Dunlap: Yeah. Let's do that. Thank you.
Leslie Boyd: Awesome. Yeah.
Leslie Boyd: We were talking a little bit about the manufacturing landscape and where exactly do you want to take that lens.
Glenn Dunlap: Well you mentioned like some of the things around your practice. So um, you said 10,000 manufacturing clients that you're serving at the firm.
Leslie Boyd: We do. And one of our key strategies as a firm is [00:03:30] focused on privately held businesses and their owners. And so I think that's something that's really unique. You know, you talked about the 130 locations and you talked about 8500 employees and 10,000 manufacturers. And I think, gosh, that can sound like a really big number. And so you might think, wow, is CLA only serving just these massive companies? And I would tell you, we are serving companies that are also Main Street America. So our strategy is really focused [00:04:00] on those private companies and what that really allows us to do with the depth and the breadth of resources that we have, is to really bring just so many resources to these Main Street America companies. And 99% of companies in the US, I don't know if you know this, are actually privately held. It's incredible.
Glenn Dunlap: Yeah, it's it really is. It's, uh, it's a select few, I think, what, 5000 or so publicly traded companies. So it's not, um, you know, there are millions and millions of, of, uh, small and medium [00:04:30] sized companies out there. So that's, uh, it's pretty interesting. And it's an interesting role. You know, when you think about the, the big the top ten CPA firms, I would say the majority of them are probably serving publicly traded companies and doing much, you know, much different strategy than to serve the privately held companies like CLA has chosen to do, which is, uh, which is interesting, which is also then going to translate very well when we think about like, uh, you know, the listeners of this, uh, podcast are most likely not working in, [00:05:00] uh, you know, with, uh, publicly traded companies and they're trying to figure out how to become better advisors, to serve those, those companies across there. So I think this is that's a perfect place to start a great conversation. Uh, you know, for us to have. So, um, one of the things, you know, as we were, you know, prepping for this, you know, thinking about, like, your, the client base and, you know, you're handed a set of financials for a prospect or you're talking to, you know, one of your existing clients. And when you look at that set of financials, this is one of my favorite questions to ask. Like, what are your eyes drawn to right [00:05:30] away? When you take on, you know, you got a PNL, you've got a balance sheet, maybe, you know, cash flow. I don't know what else they might provide you, but certainly PNL and balance sheet, when you start looking at those two things, those two sets of financials, what are the reports? You know, what is it that your eyes are drawn to that you immediately start to look at to say, I'm you know, I want to know how this company is doing. So I'm going to look at this.
Leslie Boyd: Yeah, that's such a great question. And I know we're going to get into a lot of different metrics. I want to take kind of a funnel approach to how we answer this. So probably the first [00:06:00] one that I'm drawn to more than anything is EBITDA. So earnings before interest, depreciation amortization and taxes. And some people might say, gosh, that seems like such a basic metric. But I really think that one is so important for probably 5 or 6 reasons. One key reason for that is because it's such an incredible proxy for your profitability and your cash flow. Mhm. Um, so it's critical, right. [00:06:30] If you have a negative EBITDA, it's probably a pretty clear indicator that you are going to struggle to generate cash flow. And quite frankly, if you've got banks looking at you and you're struggling to generate positive EBITDA, they're going to be probably hesitant to lend to you. So I think that's important.
Glenn Dunlap: Yeah, for sure. Like you said, it definitely, you know, pulls on several metrics. So profitability and cash flow when you're looking at when you're looking at a manufacturer's [00:07:00] um, EBITDA, what are you looking for it to be in and in relation to what. So.
Leslie Boyd: Well, I think it can vary pretty significantly based on the industry segment. But certainly, you know, it's a big topic as to their EBITDA because again, if it's negative or it's low, then and you're looking at that as well relative to revenue, then certainly you've got concerns. Are they going to be able to service their debt. Are they going to be able to invest in capital [00:07:30] expenditures. How does that impact perhaps budgeting for a new piece of equipment. And so those are some of the things you might think about. I think, Glenn, the other thing with EBITDA is we have now a significant wealth transfer that's upon us. Um, there's The New York Times is saying that probably $140 trillion of wealth is going to change hands, which just is just an incredible amount of wealth that's.
Leslie Boyd: Going to change hands.
Leslie Boyd: Over the next [00:08:00] several years with baby boomers and all sorts of reasons for that. And so a lot of people might sit there and poo poo the topic of EBITDA. I would tell you that that is really the metric that a lot of people look at when they're valuing a business to say how many times EBITDA do we have to value this business? And if you've got more EBITDA, then sometimes you can even get a higher valuation multiple too, so that the bigger that you can make [00:08:30] that EBITDA number, not only does that indicate that, yes, you probably have positive cash flow, you probably have the ability to invest in CapEx. But it also could be a very great indicator as to the value of your business if you're looking to transact. And so I think that is a really important metric to look at. And even if you're not looking to transact, I think sometimes people sit there and they go. Leslie, is it selfish to sit there and think about profitability? I mean, I can feel selfish sometimes [00:09:00] as a business owner, right? To like, say, I want to be more profitable. But I'm here to tell you running a profitable, well-run business is not selfish at all.
Leslie Boyd: That is a really important endeavor, because profitability is the gateway to being able to make choices, to be able to invest, right, to be able to buy that piece of equipment, to be able to transact, to be able to do succession, whatever that looks like. So I don't think it's a selfish endeavor at all to do that. No. Um, so that EBITDA number to me, if it's not where [00:09:30] it needs to be relative to revenue, relative to your peers and your industry, right. If you benchmarked it, maybe that's an indication to look on containing costs, whether it's with natural attrition of your employees or looking at just how you're going to look at automating things with data and automation. There's a lot of different ways you could work on that figure, but that's how I would perhaps look at that number and say, what do I need to do to get myself in a position where I can be more competitive [00:10:00] for a future exit or so that a lender will look at me in a better light? Those are the types of things I would look at.
Leslie Boyd: Sure.
Glenn Dunlap: So so when you're looking at EBITDA, I mean, there's there's, you know, so we have, uh, you know, five line items that are going into EBITDA, right? So we've got uh, earnings, interest, taxes, depreciation and amortization. So, uh, are you looking at those five line items individually as well? So not just the EBITDA number, but you know, you mentioned things like, um, you know, their investment in equipment. So [00:10:30] if everything's fully depreciated you're not going to have anything or very little in depreciation. Right. So that that could tell you how the age of the equipment right away, there are several things that you could find from looking at those, those numbers. Right. But are you seeing a breakdown of that and then kind of going, oh, I kind of expected it to be, you know, a different ratio than these, than, you know.
Leslie Boyd: Then that's a.
Leslie Boyd: Great point, Glen. Right. Because if you don't see a significant amount of investment in a business that I think down the road can be a conversation, [00:11:00] perhaps with even a future buyer as to why you haven't been keeping up with investing in your business. And perhaps that can affect the future value of your business. Because if they're going to have to come in and invest significantly in that down the road, certainly that could be a detriment.
Glenn Dunlap: Right? Yeah. So if you've if you're just milking the cash cow but you're not reinvesting for the future, then that could be, uh, that could be a bad sign. I mean, you will have made you've pulled the cash out early, [00:11:30] potentially. Right. It may be, you know, um, giving up or sacrificing some of the, the value of the business from a, from a succession or transition standpoint.
Leslie Boyd: Um, absolutely.
Glenn Dunlap: Rather than. Yeah. So, okay. Uh, but that's that's an interesting, interesting point. You mentioned financing. So I know one of the metrics that banks or investors and lenders look at will be EBITDA to annual interest. Uh, so, you know, looking at their, you know, from a cash flow perspective, are they going to cover the annual. So are you seeing is [00:12:00] there a number that is you know, what's that trending to be? I used to do this years ago, but this is not something I stay that close to now. So what's what kind of range are you seeing in that or can you say on that.
Leslie Boyd: Well, I think it's interesting. We see a broad range with clients that we serve. We serve some private companies that I would tell you have no debt and some companies that have too much debt. And they're really struggling with that. And they're very highly levered and they're struggling to service that debt. And that has probably become a much tougher issue [00:12:30] as interest rates have gone up over the last few years. Interest rates have actually never risen so far, so fast over the last 17 or 18 months. So it's actually a big piece of expense now that companies are having to deal with, um, as they manage their business right now, whether we add it back to EBITDA or not. So having said that, I think companies are evaluating that as a line item in running their business, and what they're looking at is even are [00:13:00] there other ways that they should be funding their business right now? And what do I mean by that? Well, if they need alternative sources of capital and it's difficult for them to get bank debt, some companies are even evaluating, should I be bringing in equity or family office or private equity as an alternative to debt? Right. The way interest rates are going. So it really has run the gamut right now. But [00:13:30] I think the really important thing is keeping yourself in a place where you can cover that interest expense comfortably.
Glenn Dunlap: Yeah, because so the cost of capital is going to be higher if they go out to do equity or family office, uh, typically, you know, even sub debt mezzanine, all of those things are, are much, typically more expensive than a than a than bank financing. But the. Challenges, cash flow, right to cover those things. So if those.
Leslie Boyd: Absolutely.
Glenn Dunlap: If those other sources are more patient then that that's where they may be looking [00:14:00] to, uh, some of those sources knowing that it's going to cost them more, but it's going to help them to free up that cash flow on a, on a month, over month, year over year basis right now while they're reinvesting in the company.
Leslie Boyd: It is definitely kind of a cost benefit type of analysis and trying to figure out short term, how are you going to get through some of your needs and plan for that?
Glenn Dunlap: It's always a it's a balancing act, isn't it? I mean, that's, um, if you did all equity, it's going to be incredibly expensive. If you did all [00:14:30] debt, there's going to be a trade off of of the cost of that, but also the current cash flow challenge and then some, some balance of that is, is what you're always trying to strike. And then then you have increasing interest rates, which becomes a real challenge to to manage through those things. So I mean effectively debts been given. They've been giving away debts almost for the last, what, you know, five years or something like that.
Leslie Boyd: Absolutely. And people got spoiled by that. Yeah. And I also think, [00:15:00] Len, you know, I talked about the fact that there are some private companies that have almost no debt on their books. We actually talk sometimes to business owners that have no debt on their books and really actually encourage them to say, is that sometimes a point to think about putting a healthy amount of debt on your books, really, when you're closely held to consider diversifying so you, Len, would not invest your 401 (K) entirely in Apple, right? That would be really not [00:15:30] a good investment.
Leslie Boyd: If you wait.
Leslie Boyd: You would have all your eggs in one basket. And so I think sometimes if they don't have any debt, they could consider putting a healthy amount of debt on the books to consider pulling some funds out of their business to create some diversification of their wealth. Doing some of that can be really good for the business owner. Oftentimes their asset is their biggest asset that they [00:16:00] have the business. And we concentrate a lot of times to create wealth. We need to diversify over time to maintain that.
Leslie Boyd: That's right.
Glenn Dunlap: Yeah. That's right. Well, and I think the other the other side of that too, um, is borrowing when you don't, you know, when you don't need it. It's almost the, it's sort of the, you know, the age old, uh, phrase that everybody uses that, you know, they're willing to give me money when I don't need it, but when I need it the most, then they then they don't. So sometimes it's setting up those structures when you don't need it, that can can put [00:16:30] you in a position where you, you have that capital to expand or to, to take chips off the table or do those kinds of things that you were talking about. So it's, uh, it's that's a not, that's a never ending strategy of, of, of balancing the cap table and the, you know, the, the way that the, the business is financed or structured. Yeah.
Leslie Boyd: Absolutely. Yeah.
Glenn Dunlap: Well besides EBITDA, we, we went long on EBITDA. That was great. Uh, you know, so if you've never, uh, you know, dealt with EBITDA or some of those things, that's uh, that's [00:17:00] definitely a rich area. So what else besides when you, uh, look beyond the EBITDA, what else are you looking at?
Leslie Boyd: Yeah, there's probably four other areas that I would say are maybe areas that you would think are unconventional, but I think they could really unlock profitability with a manufacturing company. So that would be employee retention. And I'd love to dive into each of these.
Leslie Boyd: Yeah.
Leslie Boyd: Inventory turnover. And then two pretty unique [00:17:30] areas that we really love at CLA but are a little bit unconventional because people don't frequently think about them. And that would be value added revenue and capacity. And I would think those two really go hand in hand like birds of a feather.
Glenn Dunlap: Okay. That's great. So let's go. It's, uh, employee retention. So what do you. So so the first thing that's not traditionally a number that's going to be on the financial statements. Right? So you're going to be looking at this in a different way. So so you're capturing this data how [00:18:00] what's what's you're going through to payroll numbers or.
Leslie Boyd: Yeah, you.
Leslie Boyd: Really have to go to payroll numbers. And, and what you're looking at when you're looking at this number is you're looking at okay for a period of time, who is still there at the end of the year. Yeah. That was there at the start of the period.
Leslie Boyd: Yeah. And you're looking at W-2s.
Glenn Dunlap: Beginning and ending W-2s. Is that.
Glenn Dunlap: Okay.
Leslie Boyd: That's right. And so if I started 2023 as an example with 40 people, and at the end of 2023, I've [00:18:30] got 36 of those same people. My retention rate is 90%.
Glenn Dunlap: Okay.
Leslie Boyd: And so you might say, why is that so important? Right. For a manufacturer. Huge host of reasons, right?
Glenn Dunlap: Right.
Leslie Boyd: If I've got turnover, then I'm retraining people all the time. And if I'm retraining those people, then I probably have a a lot of training costs. B probably have a significant amount of scrap rate as well. And [00:19:00] it could also be indicative of the fact that I've got culture issues or other underlying issues going on.
Leslie Boyd: That's right.
Leslie Boyd: Um, and so there's a ton of studies out there, like some people go, gosh, retention and all these employee engagement things, they're just soft. There's all kinds of studies out there that tell you that the more you engage your employees and your workforce, there's a direct correlation to your profitability, right? So you want to boost that EBITDA number, employee retention, [00:19:30] huge way to do that. In fact, all these things that we're going to talk about are going to tie to that big number we talked about. This is like the funnel here. So it's an important way to do it.
Glenn Dunlap: You know, I yeah. I mean, so thinking about you mentioned a couple of the costs associated with that with scrap and, and I mean, just the cost of employee morale. I mean, the other thing, I mean the, uh, recruiting, hiring, training, productivity. Yeah. I mean, you're and you're probably [00:20:00] playing paying overtime if you've got a bunch of, uh, positions that are missing. So, I mean, there's a lot of it just it's a it's a ripple effect if you, if, uh, without that there. So, so what's interesting to me about this, so thinking about this, um, uh, if I'm, if I'm an advisor, you know, working with them, I may not have access to, uh, payroll information or w-2s. So. And you're probably not doing payroll for all 10,000 of your clients either, so. That's right. Yeah. How do you how do you get this data? And where does this come up in the [00:20:30] conversation with the client. So you see out of out of normal, uh, numbers in terms of, uh, you know, HR or, or compensation costs on there and that sort of draws you to that, or is it just something you always have that conversation with the client?
Leslie Boyd: It's something that we would potentially ask for as we're going through and doing month end close or we're doing an audit, because again, as you really think about how you can know and help a client that you're serving, we think this is an important metric to focus [00:21:00] on and have a dialog around. So again, I think some CPAs want to stick to just the financials. But if you're really going to impact financials, sometimes we need to go a little bit deeper. And that might mean asking for some things that are a little bit outside the PNL.
Glenn Dunlap: Love it. Yeah. No that's great. Um, and clients are willing to willing to share that data with you, a number of employees. And I mean, that doesn't seem like something that's, um, you know, intellectual.
Leslie Boyd: I'll tell [00:21:30] you, it's not.
Leslie Boyd: A heavy lift to do that. And and think about it, Glenn, if you're doing an audit. I used to be an auditor. I'm a recovering auditor, and I asked for a lot of things that were related to analytical procedures. And I would tell you, that's not really that out of the realm of something that you might ask for to really understand the underlying nature of the financial statements.
Glenn Dunlap: Yeah, that's interesting. And it may be one that they, they overlook, you know, if they're in there living it every day and they know that they've lost a person here, a person there, and it may not seem like a lot, but [00:22:00] you might be able to look at it and spot a bigger trend or an issue that that they may not be paying attention to or are aware of, especially the larger they get and the farther removed they are from the, you know, the day to day activities, that's, uh, you know, can be a real eye opener for them to share that with them.
Glenn Dunlap: Yeah.
Leslie Boyd: And I think you could go into some interesting discussions with it. Then you could find out if the retention number isn't where you need to be. Is it a supervisor? Is it a certain shift? So, you know, is [00:22:30] it your evening shift that's really struggling? Is it isolated to a certain supervisor? I think oftentimes in manufacturing we advance somebody because they are a really good individual contributor. We didn't public accounting sometimes too. That's right. Yeah. And that doesn't necessarily mean that they have the leadership skills that are necessary then to take them to the next level. And so sometimes what that shows us is that we need to come around that person, and we need to give them more skills [00:23:00] to help them be successful. So they don't have that turnover.
Glenn Dunlap: So true. I mean there's so many and it's often they themselves are unsupervised. And you know, uh, there are things that you can't see that are happening out on the floor. So yeah, that's that's a those are big. Do you look for a is there a healthy retention rate. Is there something that you're looking for there. Like you the example you gave was 36 out of 40. So that was 90%. Is that a good number. Is that a bad number. What's um [00:23:30] you know or is there something you're looking for there?
Leslie Boyd: I think again, that's something that can really get segment specific. Right. And I think it's also varied as we've moved through COVID. I think that's changed over time.
Glenn Dunlap: It's higher. I mean, employee retention rate is lower or the turnover is higher.
Leslie Boyd: I think for a while we really had movement of people, and we're starting to see people settle down as the economy has settled down. So I think a really good starting point is understand, [00:24:00] first of all, where do you land within your segment relative to people in your segment? And then also understand where are you falling over a period of time within your company? What does that look like?
Glenn Dunlap: Yeah, yeah that's good. Well, it's also if you're thinking about growth strategies, this is an important one too. Right. Because if you're growing and yet you can't keep your people, then that's there's probably not much of a bigger impediment than having to continue to retrain a force, especially if it's continues to grow or you're attempting to grow. So that's um, it definitely, [00:24:30] definitely want to know. You mentioned being able to compare yourself to others in the same segment. Are there, um, HR numbers do you see or does? Cla produces this for your clients. Do you have like turnover, employee or employee retention rates? The positive side of it, the intention retention side? Do you have those numbers by by industry segment.
Leslie Boyd: So we do that by industry segment for certain companies. And then there are other places that you can get that. For example, in the printing world Printing Industries [00:25:00] of America does a ratio analysis. So that's where sometimes truly understanding the segment that you live in can be helpful, because you can get down and get some details about how do I compare and stack up to right competitors.
Glenn Dunlap: Yeah. Fantastic. Yeah, that's that's really good stuff.
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Glenn Dunlap: Let's transition inventory turnover. So that's uh, it's another really. So we're talking about labor. We're talking about inventory. They're probably the two biggest elements on a on a manufacturer's PNL. Right. So what about let's talk about inventory turnover. So what are you seeing here?
Glenn Dunlap: Okay. [00:26:30]
Leslie Boyd: So this one has become a big issue with Covid. And and so taking a trip down memory lane. This is why this has become such a big issue okay. First of all inventory turnover. How's it calculated. You look at your cost of goods sold. And you divide that by your average inventory over a period of time. Higher number better. What that means is that you're selling your inventory and it's moving through your shop. Lower number. Not so good. And because it means your inventory is not [00:27:00] moving through your shop, it's indicative of probably one of two things. It could be indicative of the fact that your demand has dried up, or you've just got overstocked parts. How has this happened for a lot of companies? Well, we had big, big supply chain issues that took place during Covid, so nobody wanted to not be able to sell product. If you couldn't sell and deliver your product, you couldn't produce revenue. [00:27:30] So everybody started to over purchase inventory, right? And it was expensive inventory. And then the demand started to soften. Right. And so we have everybody sitting with bloated balance sheets. And sometimes even a mismatch of what they purchased compared to where the demand is now. And so we've really had to work with companies to say, how do I work down some [00:28:00] of my bloated inventory? And so there are some ways to do that. I think that you can get yourself into trouble if you don't have a good sense for where's my future demand and sales coming from? What do I even have on my floor? So believe it or not, some companies don't even have a great sense for what inventory do I have on my floor and being able to match that with the upcoming demand.
Leslie Boyd: And so a couple of things [00:28:30] can happen. Sometimes you can think that you've got those parts on the floor, and then you get ready to produce it and you don't have it. And so then you're like, oh man, I've got to get a rush delivery of this and you way over pay for it. That's not good. Or you think you have it and you don't have it, or you've got too much of it and you order more of it and it's this vicious cycle. So we've got to get a great baseline of what we have. And we should even try to think about can we create flexibility of parts. So let's [00:29:00] say I've got an order coming for this widget here. And I don't have exactly the raw material that I need, but I've got one that's close. Can I create flexibility in my bills of materials, for example, so that even though I don't have this exact match, this one will do and I can start to work down my inventory? That's exactly what we did with a couple companies to truly help them work down that inventory.
Glenn Dunlap: Yeah. That's great. Maybe even share the same skew across, [00:29:30] uh, you know, multiple products. In that way, you're not having to buy specialized material or something like that for each product so that. Yeah. Um, it's interesting. Are there and, and I'm guessing that the answer is going to be that it's varied across the different, uh, specialties. Right. But I'm going to ask, is there an inventory turnover rate that you're looking for in a manufacturer. Is it common to I mean, you're probably not looking for 3 or 4, but 12 might be, uh, tough to hit. 24 is certainly probably, uh, you know, tougher yet, but you know, are there, are there numbers [00:30:00] that you're looking for that kind of tells you this is healthier? This is, you know, yeah.
Leslie Boyd: Again, I think it varies over time. But what I would tell you. Right. And we've got a case study on this, that, that example that I just gave you. Right. Yeah. We had a company that really got themselves into some issues, right, post-Covid. And many companies did. Right. And they had $50 million of inventory and we worked it down to 10 million. And you can imagine how much cash that unlocks on your balance sheet when you're able to do [00:30:30] that. So, you know, that was relative for them as to how much we were able to free up. But certainly that number was way out of whack for them, and we were able to free that up and really get that number down. And by doing that, really increase the turns because they had overstock and what looked like obsolete inventory.
Leslie Boyd: Yeah.
Glenn Dunlap: That's interesting. Uh, that's a that's a huge swing Leslie. Congrats on that. I mean, that's a they had to be, uh, feeling, uh, [00:31:00] like they were living large when they collected $40 million of cash that they didn't have before. So that's fantastic. Um, is are you seeing firms? So so there was kind of that pendulum swung. Right. So we went from being sort of zero, uh, levels of inventory to uh, oh, my God, we can't get anything in. And so now there was the pendulum swung far over to the other side that said, we're going to have months worth of inventory just so we avoid, um, you know, not having the raw materials or product that we need. Um, as it's, as it [00:31:30] sort of swings back the other direction. Do you feel like people are maybe hesitant to go back to, uh, you know, complete just in time or, you know, no safety stock on their inventory? I mean, are you seeing, you know, just sort of a desire to. Okay, we're not going back to zero again. You know, the, you know, just because of of these, because we're in a lot of ways, we're maybe not out of, uh, you know, Covid was maybe the part of what drove some of those things. But but you see, certainly, uh, supply chain issues still [00:32:00] you see unrest across the globe. You see, um, you know, transportation issues. I mean, those things we're not we're not sort of out of the woods on that stuff yet. Right? So, I mean, there's probably some hesitation to go back to just a completely no inventory, uh, levels on the balance sheet. Right?
Leslie Boyd: I think that's right. I just think it's going to take some balance. Right. So I think everybody probably took things too far in 2022 when we got to extreme supply chain issues. And it probably bit a [00:32:30] lot of companies because with that, not only did we buy an extreme amount of inventory, we also bought it at a highly inflated amount and material prices have started to come back down.
Leslie Boyd: That's right.
Leslie Boyd: So I think there's always going to be a little bit of balance. You need to have enough stock to be able to keep up with your demand. And I think what will really help with that is really having the ability to have good data, to be able to understand what do my forecasts look [00:33:00] like?
Glenn Dunlap: Yeah.
Leslie Boyd: Do I have materials on the floor to help me meet that forecast and truly matching my forecasts with what I've got on hand, and what that backlog could truly look like to be able to plan for that. So zero probably not practical, especially understanding that there always is some geopolitical issues we're dealing with. There could always be supply chain issues that come up with transportation, and that ebbs and flows and understanding [00:33:30] what's practical for my business.
Glenn Dunlap: Right. Yeah. And here we go through another presidential cycle. So that's going to be you know, that always does wacky things to the economy too. Um, did you have anybody switching Fifo LIFO? Uh, you know, as they started looking at, you know, crazy, um, inventory valuation numbers or something like that, does that was that a, um, something that you.
Leslie Boyd: You have had.
Leslie Boyd: People that have switched from Fifo to LIFO? It truly does depend on what does your [00:34:00] cost structure look like. The other thing we've had a lot of people reevaluate is do they have too much capitalization on their books under maybe an old uniform capitalization method, which really looks at your period costs for GAAP purposes? And was there a way to reduce that for tax purposes? Because to your point, Glenn, we had a lot more that was capitalized for GAAP purposes and that did create more capitalization for tax purposes. So [00:34:30] talk about a great tax planning strategy to say it's time to really reevaluate our tax methods to free up some cash as well. And one of the ways to do that is to look at your accounting methods for tax, um, which is helpful too, because it's been a high interest rate environment.
Glenn Dunlap: Right, right. Interesting stuff. I mean, there's so many, so many different strings to pull with just the two things we've talked about. And now this next one really has me intrigued though. So what value added revenue, [00:35:00] value.
Leslie Boyd: Added revenue and.
Leslie Boyd: Capacity.
Glenn Dunlap: Okay, so I've heard of value added tax. Talk to me about value added revenue.
Leslie Boyd: Yeah this.
Leslie Boyd: Is nothing like value added tax okay.
Glenn Dunlap: Good. Um I know.
Leslie Boyd: Completely different concept okay. So in the manufacturing world I think what's really important to consider is that most of the time we actually live in a fairly fixed cost environment. So what I mean by that is if you pay for your building [00:35:30] and you pay rent on that building every month, would you say that's a fixed cost?
Glenn Dunlap: Uh, for sure.
Leslie Boyd: Yeah. Okay.
Leslie Boyd: If you bought equipment, would you say that that's pretty much a sunk cost.
Leslie Boyd: Yes.
Leslie Boyd: Okay. I'm going to challenge you just for one more moment here.
Leslie Boyd: Okay.
Leslie Boyd: All right. Now let's say that you've got an hourly employee and he needs to work 40 hours ish a week. And if you can only give him 20 hours a week of work and you consistently do that, do you think he's going to stay?
Glenn Dunlap: Most [00:36:00] likely not know.
Leslie Boyd: Okay, so if you didn't give him 20 hours of work or you gave him 40 hours of work, a lot of times you're probably going to deploy him if you don't have it to do other things like sweep the floor. Right?
Glenn Dunlap: Sure. Yeah.
Leslie Boyd: Because if you didn't, he'd go down the street and find a new job. Right?
Leslie Boyd: Right. Yeah.
Leslie Boyd: So even your hourly employees, would you tend to say they're technically kind of a fixed cost?
Glenn Dunlap: Yeah, I would, I mean, that's how we book them now. Right.
Leslie Boyd: Exactly. [00:36:30]
Leslie Boyd: Now a lot of people don't look at it that way. So they they tend to think that a lot of their costs are variable. We build that into a burden rate and gross margin. And so many manufacturers, when they're pricing jobs, they really look at the job and they say, well, based on this overhead rate and this burden rate, I should or I shouldn't take this job. Burden rates generally assume [00:37:00] that you are at full capacity in your shop. So what happens a lot of times, Glenn, is that if you're not at full capacity, you could overburden a job and you say, this work is not profitable, I'm going to turn it away. However, I'm here to tell you that most manufacturers are not at full capacity, right? They might be at 60% or 80% of capacity. In [00:37:30] fact, last year's ISM report for manufacturing said that on average, manufacturers were at 88%. Capacity, and that could be machine hours or labor hours. Okay. Whichever one is your constraint. I walk a lot of manufacturing shop floors where they are not fully utilizing their people or their equipment. However, they turn away a job because they tell somebody that this job could not be profitable. [00:38:00] So capacity is one piece of the lever, your machine hours or your people, and you're at 60%, let's say, or 70%. If we can get more capacity, cover those fixed costs, we can win. Hold on to that for a second. Okay.
Leslie Boyd: Yeah.
Leslie Boyd: The other piece is value added revenue.
Leslie Boyd: Okay.
Leslie Boyd: Value added revenue is your revenue minus your material costs and subcontract [00:38:30] costs. Basically what that says is if you brought me materials and you said, Leslie, I am going to pay you to convert this sheet metal into this part. That's the revenue that I get after the the material effectively. So it's the money that you are paying me for the service that I'm providing.
Glenn Dunlap: Okay.
Leslie Boyd: So think about the material as just the pass through. [00:39:00] Right. It is what it is. I don't really earn any money on.
Glenn Dunlap: Okay.
Leslie Boyd: Just everything above and beyond for that. So a lot of times people don't think that they're earning enough margin on the job. But the reality is, if I have enough capacity left in my shop, even if that value added revenue that I earned was maybe a little bit lower than my average value added revenue, guess what? It would all pass [00:39:30] through to the bottom line and cover my fixed costs and increase my profitability, right?
Glenn Dunlap: Right. Okay.
Leslie Boyd: So we get two metrics there.
Leslie Boyd: We look at what's their capacity. What's their average value added revenue on a rate per hour basis either for machines or for people. And then we look at strategic ways to boost that. And you can have incredible results on profitability.
Glenn Dunlap: Okay. [00:40:00] So uh a couple of questions. So when you talk about capacity, um, if we're talking about, you know, let's do machine hours as a for instance. Yeah. Um, you know, one shift, two shift, three shifts. What are we what are we how do we how do we, uh, sort of figure out what capacity is on that? Whatever they're running today.
Leslie Boyd: You could look at it based on what they're running today. So let's take a print company. I've worked with plenty of those companies in this space many times. I've seen [00:40:30] them running at 60 or 70% capacity, and they turn away a lot of jobs because based on the press pass hours, right. They think that this high volume job can't possibly be profitable when they do the burn rate. They've got plenty of free press time, though. Either shift, the reason that it doesn't look profitable in their shop is, again, their burden and overhead rate on a traditional quoting system would tell you that it's not profitable. [00:41:00] Let's just say their average value added rate per hour. $80 an hour. So if we said, okay, you know what, we've got 1000 hours of free capacity and we can fit it into this window here. We'll take that job at even $75 of value added revenue here we can make money. So it's about finding that window and being strategic with perhaps [00:41:30] that piece of equipment that would otherwise be sitting idle.
Glenn Dunlap: Okay. All right. Is is the instead of looking at the the burden calculation being done at a at 100% capacity, should they be looking at, uh, something less than that. Should it be should they be setting the burden rate at a 65% capacity or something like that?
Glenn Dunlap: Well, you could do.
Leslie Boyd: It even based on practical capacity, because the reality is that nobody's going to be running at 100%.
Glenn Dunlap: Yeah. [00:42:00]
Leslie Boyd: Even if you do that based on practical capacity, what I'm here to tell you is that most people are still not hitting their practical capacity, and there is probably some room to really focus on how do you continue to increase utilization of your capacity and really understanding, then how do you strategically take work to fill that capacity?
Glenn Dunlap: Yeah, I maybe I'm probably going to say this wrong, [00:42:30] but I, you know, spent a few years in manufacturing and I always thought that they said that the, the theory or that the, uh, rule that they used at the plant that I worked in was that if a new job when especially when you're slow or low capacity, um, if you, uh, if a new job covered all of the variable expenses that you should take it like that, just the mentality was just like, okay, if we're going to cover all the materials, subcontractors and even the labor on that job, the variable labor on that job, [00:43:00] we should take it. Because anything that's left over from that is going to contribute to, uh, overhead, and especially until we maybe we get more profitable jobs later and we could replace that job. Uh, but it was the thought process was, let's let's, uh, let's keep the everybody on the shop floor busy. Let's keep the machines moving. Let's keep all this stuff happening and then let's and contribute to it. And then, uh, for some reason, I don't know, maybe that's maybe I'm saying that wrong, but, uh, that's so.
Leslie Boyd: I, it's, it's a very similar [00:43:30] to value add. Right. Okay. Um, and we see so many people that really can't use those levers and really get sales and finance working together right, with their production team. So you need sales and production and finance really to come together and understand that. So you can quote and you can understand what you have on the shop floor. And how do we go out now and strategically get some work so that we can keep the shop at maximum capacity?
Leslie Boyd: Okay.
Glenn Dunlap: And [00:44:00] then does that change. So like so that's that's for whatever they're running today like one one shift. And then that totally changes burden changes capacity changes. If you start looking at multiple shifts.
Leslie Boyd: Or you can certainly model that to add a shift flex you can model and change it. If you need to add overtime or add another individuals that can adjust your fixed cost structure. And when you do that, even though it might change your fixed cost structure, we've certainly found that there are ways to think [00:44:30] about that and still say, are we truly getting at what is our capacity here and are we utilizing it?
Glenn Dunlap: Mm.
Leslie Boyd: Yeah.That's very kind of.Like fitting together an erector set to.Really.Make it all.Work.
Glenn Dunlap: Well, you know, it's it's an interesting thing isn't it? I mean, uh, in any metric on the, on its own is really hard to, to make sense of it. And it's you're always like, we just had the discussion about the, the financing and the costs related to that. I mean, it's it's, um, [00:45:00] you know, any of those levers on their own could be you could you could go dramatically out of out of whack in one direction. That's right. And it's same, same here. I mean, if you're, um, if you're running at 120% of capacity for a long period of time, that's likely not going to be healthy for the team either. I mean, so it's like there's trying to find that, that, that balance in there, that, that, um, you know, is is the right healthy balance for, for that firm for I mean, like if you if you mentioned [00:45:30] 100% capacity is never the case. There's always you're always going to have, uh, you know, turnovers and transition times between runs and all those things that just, you know, that's quote unquote downtime. But it's, uh, you know, it's part of that, uh, production element. So.
Leslie Boyd: Absolutely. Yeah.
Glenn Dunlap: Uh, you know, so this has been, uh, great discussion around that. I just have a couple more things for you, and then we'll wrap up. So just in general, if we take a step back from kind of what's happening, we talked about geopolitical things. I mean, [00:46:00] you know, what are the a lot of the common questions you're getting right now from manufacturing companies. Is it around financing and interest rates? Is it around capacity or people or labor issues or what? What's just sort of the general sense in, in in the manufacturing industry in general? You know, across the board.
Leslie Boyd: I think we're seeing a few key themes. One is definitely around workforce. And what are the key topics around workforce maintaining your workforce, hiring your workforce, pouring [00:46:30] in your workforce, appropriate compensation levels. And we've got an HR outsourcing team, and they really do lean in and help support that. And so that's been phenomenal. We also see a lot around supply chain right now, just as we talked about with balancing that and inventory and really digging into that. And I think data and automation can be critical there with not only supply chain but but really dealing with a lot of these issues. And so [00:47:00] I think that's a big topic. And I think we will see data and automation become a bigger topic for manufacturing companies, not only with finance, but also as we really get into production lines. So you hear a lot of companies talking about that with robotics. It to your point about everything Interplaying it interplays with the workforce too, right? Because can you automate certain pieces of your. Production line.
Leslie Boyd: Two.
Leslie Boyd: And if you do that, how [00:47:30] do you need to train your workforce differently to really be able to be skilled enough to do that? So it's definitely a conversation that we're talking to companies about. And then even Inflation Reduction Act and really thinking about ESG and carbon issues related to that. It's something that we're seeing a lot of as well. And how do you navigate all of these new regulations that are coming out related to that, too?
Glenn Dunlap: Yeah, that's that's good. Are you sensing I hear things [00:48:00] about, um, accessing capital. Certainly. We've talked about interest rates going up, but do you, do you sense that companies are having a challenge, especially in the manufacturing industry? Are they having a challenge with accessing capital from banks, or how besides just the fact that it's going to cost more with the, you know, interest? And so they've got those things to weigh out, or is it is it a different conversation with the with banks and lenders today?
Leslie Boyd: I definitely think it is a different conversation with banks and lenders. So [00:48:30] I think underwriting is more complicated with banks and lenders. I think they're going to do a lot more due diligence and want more information. I think they're going to want deposits and the whole relationship. Whereas before I think they would certainly lend on a piece of that. I think it's a much more difficult conversation is what I've seen with clients that.
Leslie Boyd: We.
Leslie Boyd: Serve, and I think it's also just evolved in so much that they, you know, not only want that holistic [00:49:00] relationship, but you talked about at the beginning how you really need to have an early and ongoing dialog if you want to have that relationship with the bank. I used to say, you know, banks want to lend in in good times, not bad times. And I didn't mean that in a funny way when I would have those dialogs with people. I think what I mean by that is you need to have an established relationship with a bank all the time and know them before you need the money, right? Because if you know somebody and you've built trust with them, then [00:49:30] they're going to be a lot more likely to want to lend to you prior to you needing that money. So I think go out and network with those banks and build those relationships well in advance of ever needing that money.
Glenn Dunlap: Yeah, that's right. And it seems it can seem like it's just. Not time well spent at, you know, when you're when you don't need it and you're just making those relationships. But it it definitely pays off when, when you do need it that you know, you're not starting from ground [00:50:00] zero and having to explain everything, that there's definitely a relationship there that they can build on. So that's, uh, that's good. Well, Lesley, this has been a great conversation. I really appreciate you joining us today. If somebody wants to get a hold of you or or or CLA, what's, uh. How would you recommend they do that?
Glenn Dunlap: Absolutely.
Leslie Boyd: So you can go to our website, ClickOnDetroit.com, and you can absolutely call me as well. My work line is (317) 569-6329. [00:50:30] We are so passionate about helping manufacturing companies and we would love to chat with you.
Glenn Dunlap: Well, fantastic. Well thanks Lesley for joining us today. And thanks everybody for sticking with us, uh, here today. And we hope that, uh, you know, this episode of Best Metrics has been great for you to, uh, you know, understand better the the levers, the metrics, the ways that you can use this information to help your manufacturing clients. So until next time.
Leslie Boyd: Thank you.
