M any of the challenges we see in manufacturing, and engineering businesses stem from one core issue: poor or declining gross profit. While margin pressure is not unique to these sectors, each faces its own operational complexities that can quietly erode profitability if not properly managed. To put the importance of gross profit into perspective, a 5% reduction for a business with £20 million of turnover equates to a £1 million drop in profit. Recovering that loss through increased sales alone is extremely difficult, which is why protecting margin should be a priority for management teams. Below are some of the key areas we regularly see impacting gross profit, along with practical considerations for addressing them.
be less profitable than the work carried out in normal hours. If the increase in turnover is permanent, consider larger premises to accommodate a larger day-shift, or employ night-shift-only workers at normal rates.
Costing systems
Robust job costing and work-in-progress tracking are critical. Implementing a costing system, such as NetSuite, allows businesses to understand true job profitability, identify issues early, and take corrective action before margins are lost.
Customer variations
Where engineering involves an element of offsite installation, ensure that documented procedures exist to cover customer changes(variations). Customer’s representatives are known to turn up on site and request changes to the install/build. Changes can of course be accepted – but only once management has been informed and a variation notice has been agreed by the customer, along with the extra costs. The site staff have to know get written approval before the variations are done, not after!
Buying
It sounds obvious, but regularly checking supplier prices and researching new supplier options is important. If buying from overseas for the first time, remember and price in import duty and transportation costs – these will add to the basic purchase price. Opening foreign currency accounts for overseas transactions, or using a specialist currency broker, can save large sums on currency transfers.
Pricing
Businesses are often reluctant to pass on inflationary price increases to customers, for fear of losing work. What this reluctance does is reduce the gross profit, meaning that you need to increase sales, just to stand still. Sometimes the reluctance is due to clients feeling that they cannot put inflation (say 3.5%) on all future jobs ‘carte blanche’. That is not always required – sometimes you can reach the same overall inflationary increase by variable pricing. Some jobs may be able to take a 5% increase, some 2%. Overall, you are trying to get as close as possible to 3.5% overall.
Investing in efficiency
It sounds contrary advising clients to spend when they are trying to make more profit! But I am talking here about investing in long-term assets, in order to reduce machining/construction time (or wastage), to achieve better margins. Investing £250k in machinery with a 10-year life (so a cost of £25k pa), that will produce £100kpa in savings, is obviously money well spent. But it’s not always about the savings. Unreliable machinery causes lost time and hence loss of profit – paying workers to drink tea for days whilst machines lie broken and idle is lost profit. Investing in new machinery, solely to reduce downtime, is also money well spent.
Management Accounting
Good stock and work-in-progress control, along with regular and accurate management accounts, is imperative. I normally suggest the production of monthly accounts, with formal quarterly minuted meetings to review and discuss the results. I cannot stress enough the importance and value of timely, accurate management accounts. You cannot make informed decisions without them. All of the points above involve management putting systems and controls in place, to ensure that the business runs as efficiently as possible.
Control of wastage
Lack of awareness around inhouse wastage of materials is common. Sometimes this is down to lack of staff training, sometimes down to lack of supervision and accountability. If there are no consequences for mistakes, where is the incentive for care? Consider offering the production management team incentives for improved efficiency. Invest in quality staff training – the costs will be recouped.
The goal is simply: Work smarter, not harder!
David Yates, Partner at EQ Accountants, Part of the Sumer Group David specialises in supporting SMEs across a wide range of sectors, with particular experience in construction, engineering, IR35 contractors,management consultancy and tax. With over 30 years’ experience as a managing director, he brings a practical, solutionsfocused approach and is known for helping clients navigate complex challenges.
Overtime
By far the most common culprit. I don’t know how many times I have heard clients happily announce ‘We’re so busy that we’re working evenings and/or weekends!’. To which I reply ‘Great, but are you pricing that overtime into the jobs?’ If you have standard pricing in place, then the overtime work will obviously
MANUFACTURING AND ENGINEERING | SCRUTTON BLAND | 9
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