Capital Ideas


Readers of this blog know that I’m a supporter of the Manufacturing Extension Partnership. MEP headquarters recently released a report prepared by consulting giant Booz Allen Hamilton entitled Small Manufacturers Capital Access Inventory and Needs Assessment.[i] Wonderful, I thought, if there is anything that smaller manufacturers need to cope with today’s economy, it is adequate access to capital.


 


Today’s Situation




In case you have forgotten, today’s smaller manufacturers face:




Global competition
– Intense competition from, literally, a world of low cost competitors, in almost every product area.




Big customers
– Customers whose size relative to that of the manufacturers who supply them positions those customers to exert enormous pricing pressures. Additionally, larger customers increasingly demand that suppliers carry (hence finance) finished goods inventories available for “just in time” shipment.




The productivity gap
– Labor productivity among smaller manufacturers significantly lags that of their larger domestic rivals. An earlier post to this blog discusses this gap.[ii]




Risk-adverse lenders
– The recent recession has left lending institutions focused on their own balance sheets. They are concerned with the quality of their loans portfolio and with their capital reserves. They are reluctant to make new loans or increase existing credit lines. The graph (below) is from the Capital Access report. It vividly illustrates how tough it has been for smaller manufacturers to borrow over the last several years. Frankly, the graph is pretty scary.Capital Requests Chart



Asset based financing – Most smaller manufacturers are financed with debt, secured by fixed assets (land, buildings and equipment), and by personal assets of the business owners. During the recent recession, real property value assessments have declined, reducing the collateral value of those assets. Similarly, personal asset valuations have declined, further reducing available collateral. Ouch!




Missed opportunities
– Real opportunities, such as opportunities to significantly reduce energy costs through energy efficiency improvements have been deferred due to reduced revenues during the recession. Reduced revenues mean that neither cash nor human resources are available to take advantage of opportunities.




The Capital Access report does present a number of financing possibilities for smaller businesses, especially through sources associated with government. The report also suggests that the MEP Centers provide more help to manufacturers in finding capital. Every manufacturer’s financial officer or financial advisor should be aware of the Capital Access report. It’s no panacea, but it could help.




Going Forward




As tough as the near term financial situation may be, there is the longer term to be considered as well.




The very beginning of the Capital Access report disturbed me. It pointed out that businesses have different capital requirements in the various phases of the business life cycle. However, Sustainable businesses are designed to “thrive in perpetuity”
[iii]. For me, “thriving in perpetuity” implies that Sustainable businesses have a continuum of business model life cycles, rather than a single business life cycle. The DuPont Company provides an example of a business model continuum.




The DuPont Company is over two hundred years old. For over a century, DuPont manufactured explosives. Then, early in the 20th century, DuPont became a research driven company that brought us Nylon and a host of other “Better Things for Better Living, Through Chemistry”. Recently, DuPont morphed again. Today DuPont is a self-styled “Science Company” that emphasizes higher margin products based on renewable, bio-based sources.




It appears to me that a realistic Sustainability plan, one designed to “thrive in perpetuity”, needs to include a well thought out plan for capital availability across the business cycle, in order to fund future growth and innovation. Additionally, that plan needs to consider at least three continuous modes of innovation: process innovation, product innovation and business model innovation.




These will be discussed in future posts to this blog.




Your thoughtful comments and experience reports are always appreciated. Click on the title of this post to open the comments section.Chuck - France




…  Chuck Harrington   (
Chuck@JeraSustainableDevelopment.com)




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[iii] Werbach, Adam, Strategy for Sustainability, Harvard Business Review Press, Boston (2007), page 9