Exact's Pieter Hamans explains why manufacturers with long-term business growth plans need to make more of third-party business advice.
Independent studies of UK SMEs commissioned by Exact suggest that small to medium-sized manufacturing businesses lose tens of billions of pounds in potential revenue; and struggle to adjust to new trends, such as, manufacturing in smaller series.
A lack of time to consider improvements – because they are too busy ‘in’ the business, rather than ‘on’ the business – and a narrow focus on operations emerge as the main stumbling blocks, as SME manufacturers face an ever more globalised, cost-pressured market environment.
The research also reveals they do not know where to find appropriate advice – when their accountants could be their first port of call.
Overcoming business myopia
There is an acute risk that manufacturing SMEs will become myopic and jeopardise long-term business development. One of the main areas neglected as a result, is the company’s systems and processes.
A significant number of small manufacturing companies continue to rely on pen and paper or, at best, spreadsheets.
Managing complex matters such as your inventory, Work In Progress (WIP) or Supply Chain Operations Reference (SCOR) metrics in this way isn’t sustainable, when you need to run an efficient, internationally competitive operation.
And even those manufacturers with automated business and financial systems tend to use separate solutions for different tasks, such as accounting, product costing and inventory management, resulting in siloed ‘islands of information’.
As business owners cannot get a comprehensive view of their organisation, they run the risk of missing key information and insights to set appropriate Key Performance Indicators (KPIs) in their forward-planning processes.
This adds to the sector’s propensity to focus mainly on cashflow and products. However, the best quality product doesn’t help if the focus is on low-margin products or customers, or if working capital is stuck in WIP and inventories.
For example, repeat purchases may not be driven by your product quality, but by cost – customers may simply choose you again and again because you are the cheapest. But with only patchy information available, many businesses can’t tell why their customers keep coming back.
Firms need to refocus their attention and get a good grasp of where they can create value. To do so, they need to establish a better framework for monitoring their whole organisation, establishing KPIs and acting on them.
Making the most of your accountant
This is easier said than done, of course. However, it’s surprising that SME manufacturers claim they don’t know where to turn for advice.
Our research found that less than a third of company owners involve their accountant in their business planning. for example, with many undertaking planning either on their own or with a business partner.
Why are they not drawing more on an already established advisory relationship?
First, the role of accountants has fundamentally changed in recent years, but their image hasn’t. With the proliferation of automated accounting, the profession has moved on from the image of the ‘bean counter’ who checks books and helps with the annual report.
Accountants have seized upon the needs of SMEs and developed a much broader range of services, making them more akin to management consultants – at a fraction of the cost.
That said, cost is the other reason for manufacturers not calling on accountants more. Using an accountant amounts to something of a distress purchase, and companies will only talk to them when there is no alternative to paying for their advice.
Accountancy firms certainly have some way to go to re-set their image – including cost versus value perceptions. In our experience, we have found that those companies that take business advice from their accountants perform markedly better than their peers. So clearly the investment pays off.
An investment that pays off
Accountants can bring a wealth of experience to the table when it comes to advising smaller manufacturing firms on how best to develop their business.
The typical manufacturer lacks knowledge in determining work centre rates, WIP accounting, and inventory valuation. Through their involvement with other firms, they will be able to share learnings of what has and hasn’t worked in the past.
They are also in a unique position to interpret a firm’s data and, looking at it without preconceptions, pick holes into what management may see as the status quo. This includes gaps in companies’ systems and processes that need to be plugged to move from a patchy information landscape to a holistic perspective that delivers actionable insights.
For example, a cheese maker in the Netherlands saw profits rise after its accountancy firm had recommended improvements to procurement processes and pricing, and advised on how to better deal with demand fluctuations to reduce wastage.
Working with accountants can help SMEs recoup some of the billions that they have so far been losing, as well as coach them to develop their businesses toward a competitive future.