Financial Sense with Jason Glisczynski
Part 3 of 5: Reducing Your Cost of Capital
Time for some of that unconventional wisdom. Part 3 of my 5-part series on The Internal 5 for Manufacturers addresses the cost of working capital. As a reminder, here are the Internal 5 challenges across the manufacturing space:
- Excessive Taxation
- High Insurance Costs
- Expensive Working Capital
- Talent Acquisition and Retention
- Suboptimal Business Transitions
The manufacturing industry is EXTREMELY capital-intensive. Cheap labor isn’t skilled, and skilled labor isn’t cheap. Equipment is expensive, and keeping up with technology is a constant battle mentally and financially. The interest rate environment is great for savers, but not so great for borrowers.
When growing a manufacturing business, owners and executives often butt heads on the best way to deploy or acquire working capital (money). Pay cash? Finance? Lease? Skip it all together? For example, the facility may benefit greatly from adding automation by purchasing a robot or co-bot for their facility. These pieces of equipment may be expensive and turning that purchase into a positive ROI (return on investment) could take a significant amount of time between waiting for installation, testing, training, troubleshooting (because nothing works perfectly out of the box), and ultimately achieving maximum throughput.
WARNING: some of what you are about to read may be unsettling. Reader discretion is advised.
The two biggest threats to making the right decision are your ego and irrational loyalty. Yes, it’s almost always you, the decision maker. Those who know me are fully aware that I am a no bullsh*t, straightforward, lay your cards on the table and don’t sugar coat it kind of guy. The “stick to the status quo” and “if it isn’t broke, don’t fix it” mentality is what separates the businesses that scale and those that look at the competition and say, “How the heck did they pull that off?”
Let’s start with step one, mathematics. Paying cash gives you zero leverage. Period. Why do some of the wealthiest people get loans when they have millions of dollars in cash? Because it’s smart. They keep their cash working and create leverage using other people’s money. Granted, I didn’t say it wasn’t risky. Paying cash is the safe play, it isn’t how you grow. The key is to borrow smart. I’ll never forget the day I talked with a commercial lender about a mutual client and the lender said our VERY wealthy client wasn’t happy about the loan terms and said, “Fix it, or I’ll pay you off. Do you want the loan or not?” This individual is worth 100s of millions, yet he has loans.
Let’s move to loyalty. I get it, the bank that gave you your first loan believed in you when nobody else would and took a chance. You want to be loyal to them. My clients are super loyal to me too, but at the end of the day they (and you) need to do what is best for you. Loyalty only goes so far, and at some point, it is time to move on. You can always give them a shot at the business, and if they are truly professional, they will understand “it’s just business” if they don’t get the deal.
Let’s tackle the old adage: It’s better to own than to rent. I call BS, big time. In addition to smart borrowing, the leasing space particularly when it comes to equipment and technology has moved light years ahead of where it was 10 years ago. With the pace of advancement in tech, oftentimes you can create positive cash flow and subsequently a positive ROI without spending a dime. The key is to work with the right provider that has not only the best lease terms, but also the resale network to move tech in and out of your facility quickly with little to no cost, giving you access to the best tech quickly and at a fraction of the cost. WARNING: don’t use the leasing program offered by the vendor selling you the equipment, most of those contracts are junk.
BONUS: The state of Wisconsin has a grant program that is super easy to qualify for where you can have a highly skilled automation expert come in, evaluate your facility, determine if and how to deploy automation, and write the grant for you to help pay for implementation up to $30,000. It’s a no-brainer, yet so few are aware of this state-funded program.
Manufacturing generates $60 billion in output according to the Wisconsin Chamber of Commerce and there are opportunities the state and federal government make available. Time to start thinking outside the box, before your business ends up buried in one.
Jason Glisczynski is co-owner and principal advisor for Silvertree, LLC. He is a CERTIFIED FINANCIAL PLANNER Professional and a Certified Private Wealth Advisor Professional and specializes in working with business owners, executives, and workers in manufacturing.
Investment Advisory Services are offered through Brookstone Capital Management (BCM) LLC, a Registered Investment Advisor. Silvertree, LLC and BCM are separate companies. Visit www.silvertreeplan.com for more information.