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Keep Proprietary Processes Secret

Author: Larry Chester

Companies create products or develop services to deliver to their clients. Many find a unique approach that gives them an advantage over their competition. Some of these ideas can be patented, but many cannot because they’re either an operational approach, or a unique blending of services. In either case, your unique advantage still needs to be protected.

Bringing Value Through CFO Insights

When a company creates a value proposition that brings clients to their door, it may be the result of an operational twist, innovative thinking, or a new way of assembling components. Companies are very proud of what makes them unique and shout it from the rooftops. But that pride can disappear in a hurry when others take that idea and incorporate it into their own business model. When the unique becomes commonplace, the advantage is lost, along with profitability.

  • Business – Manufacturer of industrial models
  • Location – Northern Illinois
  • Sales – $11,750,000
  • Ownership – family owned

Initial Contact –

The father served primarily as a guiding light to the business, while the son led daily operations as the president. The son had reached out to help identify issues that were affecting their ongoing profitability. The family had two companies operating within their facility. One made stock models that were sold from a catalog, and the other produced structural prototypes of critical manufacturing components for major corporations.

Significant Findings and Recommendations:

Business Operations

The company producing stock models had been profitable, while the prototype company lost money consistently. More recently, the stock model company had experienced a drop in sales, and some customers of the prototyping business were not returning, leaving the company with idle manufacturing capacity.

The prototype company had made a major investment in metal 3D printing. When Fortune 50 companies approached them for prototypes, the company proudly showed off their manufacturing floor, with six machines costing over $500,000 each. For the company, this was a huge investment but their clients saw it as an instruction manual on how to produce the prototypes themselves. Soon, some customers set up their own prototype production.

Recommendations

  • Close the door on plant tours. Even though the machines are readily available, this is still bleeding edge technology for most companies. By leaving the actual production methodology a mystery, customers will appreciate the quality of the prototypes produced, unaware of how they were made.
  • Shift focus of company expertise from prototype production to design with rapid delivery of the prototypes. The machines are becoming more readily available with each passing year. By using their extensive expertise in the design of prototypes for metal 3D printing, they can become a specialty engineering design company rather than just a manufacturer. This will allow them to create a new market niche with their core competency.
  • The stock industrial models were being sold through distributors. The distributors were availing themselves of internet-based sales opportunities, eliminating the need for a direct sales force. To maintain margins and profitability, the company needed to consider changing their sales approach, eliminating the middlemen, and going direct to consumers through the internet marketplace.

Financial Reporting and Accounting

The general ledger layout is generic in nature. The chart of accounts doesn’t reflect the unique nature of the products that the company sells, nor the specific cost elements of manufacturing. Some account allocations are miscoded, leaving zero balance accounts negative. The non-standard reporting creates minor issues with annual bank audits. The company has never created a budget for planning purposes.

Recommendation

  • Redesign the chart of accounts so that balance sheet and income statement accounts are properly classified and present a more standard financial report for both management and the lender.
  • Prepare a budget for the coming year for each company. Consider refinancing current company debt providing more cash and longer payment terms, relieving monthly cash flow pressure.
  • Develop a set of Key Performance Indicators with dashboards for manufacturing and monthly company performance.
  • Make use of fraud protection services offered by the bank, including Positive Pay and Fraud Protection on ACH transactions.

The business climate is always changing, and companies are continually struggling to find unique ways of delivering quality products or services to their customers at a lower cost. In the process, they may make use of new technology, or find unique ways of creating products, or reducing costs through operational efficiencies. It is often that creative approach to business that is indeed their core competency.

But whatever the company is doing, there is a fine line between promoting your capabilities, and giving away the store. Ever expanding technology will make things more available to the greater business market. However, providing a window into the way you became successful may not only bring you new customers, but increased competition as well. Carefully identify your unique offering to the marketplace. If it can be easily replicated, then be cautious about publicizing the details. By keeping the details close, you may protect your position in the marketplace.

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