Risks in the Manufacturing Industry
Taking these financial risks into account while formulating your business model will keep your manufacturing company out of trouble.
Starting a new business can be daunting and stressful. You need to figure out where you want to base your business, figure out the legal aspects, pricing, partnering with a reputable supplier, as well as defining your brand and target audience. One of the most daunting challenges that comes along with starting a new business is the financial burden. Every dollar counts and one wrong move could result in disastrous consequences. That is why it is important to steer clear of these common mistakes.
1. Negotiate Weak Contracts
When deciding to partner with a supplier or factory, it is imperative to negotiate and evaluate contracts. A strong contract serves as a legal record that will hold all parties involved accountable to the agreed upon deal. Being aware and attentive to contractual agreements will limit exposure to risk and potential miscommunications and undesired outcomes. A weak contract could put you and your business in more jeopardy than having no contract at all. An essential aspect that these contracts should include should be a contingency plan. Due to the unpredictable circumstances that happen to even the top manufacturers, having a contingency plan is critical.
2. Be Aware of Extending Payment Terms
Down the line, it is important to form meaningful relationships with partners and customers. Sometimes even the most loyal customers will not be able to follow through with payments. During these times, you might consider extending the terms of payment despite not knowing what the repercussions will be. Although it will feel like the right thing to do, especially after forming a close bond to the customer, it will put your business at risk. After the payment period has been extended, more often than not, original equipment manufacturers (OEM) are often allowed to pay a no-interest loan from delaying payments. In this way, many suppliers hold leverage over their customers because it truly is a collaborative relationship. Extending payment terms is a phrase that doesn’t really capture the essence of business that occurs throughout the supply chain.
3. Having Confidence During Boom Times
Financially, when things are going well, it is tempting to bite off more than one can chew for a few items on the wish list. However, unless these purchases are directly improving business, it’s best to remain cautious when spending. Although new equipment and systems will create efficiencies in operations and processes, new or untrained employees might hinder progress during production periods. In turn, this would alter the boom cycle into a new struggle. It is imperative to create a cost-effective plan that seamlessly integrates new additions and saving methods.
More than 98% of manufacturing companies in the U.S. are considered small businesses with less than 500 employees
Taking these financial risks into account while formulating your business model will keep your manufacturing company out of trouble. More often than not, the manufacturing industry is composed of small businesses. According to the U.S. Center Bureau, more than 98% of manufacturing companies in the U.S. are considered small businesses with less than 500 employees and nearly 75% of manufacturing companies actually have less than 20 employees. The responsibility that comes along with being a part of this community of small organizations often hinders on the side of financial stability and awareness.