The decision to make an expensive equipment purchase can be challenging for even the most savvy CFO or purchasing officer. Though uncertainty about the current economic climate may cause you to think twice about a large capital expenditure, your motives for the move (for instance, need to grow, improve quality or meet a government requirement) can be balanced with good financial planning and solid research.
It is very important to know that your spending will yield a return on investment. When factoring in related issues, like equipment depreciation schedules, training requirements for your staff and tax implications, it also helps to look outside your organization and understand the bigger factors impacting your market and your customers. Third-party research, like surveys and economic outlooks, can provide valuable insights.
This article looks at data from our Group Outlook Surveys that were conducted in January and August 2010 and 2011, as well as the survey of our member companies’ CFOs this past February, and they reveal an optimistic outlook for many manufacturers in the U.S. These encouraging predictions may also lead to good conditions for investing in a significant capital expenditure.
First, the Group Outlook Surveys show that small and midsized manufacturers have maintained strong optimism about immediate revenue expectations over the past few years. Each survey we have conducted since December 2008 has asked respondents for their revenue projections for the coming six months.
When we look more closely at the four most recent Group Outlook Survey results from the past two years, we see an average of 49 percent said they anticipated revenue increases for their companies. In addition, an average of 40 percent said they anticipated revenues would stay the same for their companies.
This data captured from recent Prime Advantage Group Outlook surveys shows that small and midsized manufacturers have had a healthy level of optimism about their own prospects over the past two years.
Our CFO Survey from February 2011, which asks respondents for their predictions over the coming year, shows that 67 percent of our member company CFOs were optimistic about the financial prospects of their companies in 2011. This is up from 64 percent optimistic in 2010. This result echoed the Duke University/CFO Magazine GlobalBusiness Outlook Survey concluded March 3, 2011, in which 67.4 percent of those surveyed reported optimism in the manufacturing sector.
This data, from the 2011 Prime Advantage CFO Outlook Survey, shows that optimism about the economy has increased among manufacturing CFOs in the past two years.
The latest GDP data from the U.S. Commerce Department from July through September also offers reasons for hope, with business spending on equipment and software up 17.4 percent and spending on factories up 13.3 percent. Business inventories subtracted just over 1 percent from GDP growth in the third quarter, which is a sign that businesses have lean inventories and will need to restock them.
Our Group CFO Survey offered another sign of economic cheer, with 92 percent of respondents indicating that their companies would be making capital expenditures in 2011 (88 percent of which would include manufacturing equipment).
This data shows that a large percentage of CFOs from small and midsized manufacturing companies were planning to approve manufacturing equipment investments this year, as taken from the 2011 Prime Advantage CFO Outlook Survey
In addition, 74 percent of these CFOs said they would leverage available temporary tax credits to make improvements in manufacturing equipment, while 27 percent said they would accelerate purchases of computer hardware and software in 2011.
Related to this, 79 percent of respondents to the August 2011 Group Outlook Survey said their capital expenditure expectations for the rest of 2011 would either remain the same (54 percent) or increase (25 percent). Over the past four Group Outlook Surveys, dating back to January 2010, an average of 33 percent of respondents said their immediate capital expenditures (for the next six months) on property or equipment would increase.
This graphic, containing data from recent Prime Advantage Group Outlook surveys, shows that small and midsized manufacturers have been generally optimistic about their likelihood to make significant capital expenditures over the past two years.
Similar projections were recently offered in the National Association of Manufacturers’ 3Q 2011 survey with 82 percent of manufacturers expecting capital spending to increase or stay the same over the next year.
Respondents to Prime Advantage’s 2011 CFO Outlook Survey also said they have seen credit availability loosen since the financial crisis, with 45 percent saying borrowing conditions have improved since 2010. Similar results were found in the Bank of America CFO Outlook 2011 study, with 28 percent of respondents thinking the availability of credit has increased.
However, the availability of credit still remains an issue, with 86 percent of respondents saying their customers are at least somewhat affected by this factor. This result is more positive than our 2010 survey, in which 91 percent stated their customers were at least somewhat affected by availability of credit.
While pinning down the best time to invest in your business can be difficult, we know it can ensure profitable growth and a promising future.
Forty-four percent of respondents to the August 2011 Group Outlook Survey said new products and/or new customers are fueling their growth. This demonstrates that U.S. manufacturers (including some of your own competitors) have continued to invest in new product development through the latest economic downturn and are seeing the benefits of those investments.
The final takeaway relates to a practice our members employ consistently when it comes to procurement and capital expenditures, and it revolves around risk mitigation. They demand a supplier providing a quality product with an excellent level of responsiveness and service.
Having a formalized audit and evaluation process ensures our members not only identify the best supplier options, but they’re able to build quality depth within their supply chain as well. Prime Advantage’s process for qualifying suppliers for our group is proprietary, but some aspects of this process that should be in every supplier review process include these steps:
- Reputation in the market
- “Reference-able” clients
- Existing relationships in the market
- Ownership structure/history
- Business risk mitigation
- Internal processes
- Delivery capability
- Quality of deliverables
- Customer interface
- Professionalism, flexibility, integrity
- Understands your business goals and overall business environment
- Cash flow
- Competitive pricing
Our company, Prime Advantage, is a buying group of more than 700 small and midsized industrial manufacturers throughout North America. Because of our relationship with these manufacturers, we’re able to appreciate the extensive process that leads to a major capital investment. We help these member companies save money on the raw materials, components, services and supplies that they need to run their businesses every day, but we also help them in their own sourcing efforts.
Our process includes the ability to offer our members pre-negotiated discounts and rebates through our network of audited suppliers. We also keep our fingers on the pulse of the manufacturing market through regular surveys (which include the top finance and purchasing officers for manufacturers that span more than 25 different industries, including commercial food service, packaging, truck and trailer, material handling, food processing, and construction).