Road to Recovery

Brad Netzel, CPA   email
Auditing & Accounting Senior Manager
April 2011

Now that we are seeing signs of the recovery in the manufacturing industry, it is important to revisit decisions that were made when in "survival mode" during the recession. This means revisiting strategic plans and future goals but remaining flexible enough to handle any bumps in the road to recovery. It will be important for you to be smart with your money to make it go further and rebuild equity levels that were diminished during the recession.

Evaluate your Workforce

Many companies got creative in developing ways to run leaner with fewer employees in order to match spending levels with reduced volumes. While it's important to keep a close eye on expenses, it is just as important to make sure those expenses are providing the company with the same benefit that they used to. With reduced headcount, many employers have acknowledged that they are running too lean. Studies have shown employees can handle the increased workload during the short term, but tend to get burned out if they are asked to operate like that over an extended period of time. Also, when employees are swamped with work that has to get done, the more strategic, long-term projects tend to take a back seat. As volumes increase, keep an eye on your productivity metrics to make sure you do not burn out your existing workforce. If projections are not strong enough to warrant adding full-time hires, look to temporary labor as a viable alternative to allow your full-time employees to get back to key strategic projects.

Take Advantage of Incentives

In many cases, state and local governments are looking to attract or retain businesses. This can mean reducing costs of adding new employees or providing additional funding for expansion or enhancement projects. If you are looking to grow, and have the capital available, now could be the best time to take on that project and get the most bang for your buck. There are numerous incentives, signed into law in late 2010, that manufacturers can take advantage of during 2011 and 2012 that were. One of the most significant incentives that you should talk to your tax adviser about is the increase in potential bonus depreciation from 50 percent to 100 percent of qualified additions up to $2 million. This can have a dramatic impact on reducing the payback period of any capital projects that may have been put on hold.

Re-look at Old Strategies

While there was a lot of discussion during 2010 of possibly removing the LIFO (last-in, first-out) method of inventory valuation as a tax strategy, it still remains in the tax code. With many economists predicting inflation due to the levels of spending by governments around the globe, now may a good opportunity to re-look at the method your company is using. As you may be aware, if you select the LIFO method for tax, you will have to use the LIFO method for your financial statements as well. There are certain costs of complying with the LIFO rules; however, the benefit can far outweigh the costs if your company is expecting significant inflation in the future.

Plan for Future Funding Requirements

With the growth experienced in 2010, many companies are optimistic about what 2011 may hold. However, due to the business declines during the recession, funding sources may have been reduced or had debt covenants adjusted, usually to be more stringent to protect the bank's investment in the company. Properly forecasting your debt covenant compliance is an important step when looking to make decisions on expenditures during the recovery. Make sure to include working capital increases when forecasting your funding needs. Customers are still looking for terms similar to those received during the recession, so your working capital requirements will be higher during the recovery than prerecession levels with similar revenue levels. This will help ensure that you do not run into future covenant issues.

Companies will most likely experience a gradual recovery as economists debate what impacts inflation, sustained unemployment levels and global credit markets will have on businesses. This will require owners and managers to remain diligent about containing expenses while finding a balance with investing in the future. The environment is right to take advantage of incentives to assist you in continuing to grow your company and get back to prerecession performance, but do not forget the lessons you learned (both good and bad). This will make your company stronger in the long run.