25 Ways Manufacturers Can Drive Profitability – October 28, 2014 by Gina Nocera

Cohen & Company recently hosted “25 Way to Drive Profitability,” a workshop in Youngstown geared specifically toward manufacturers. Beginning with an overview by Rick Schiraldi of the Valley’s manufacturing roots and history, and of the firm’s commitment to the manufacturing industry, the event focused on techniques, incentives and other opportunities to help manufacturers increase their profitability. Topics from Cohen & Company presenters included everything from methods to drive success and improve operations, to best practices and production efficiencies, to strategies for minimizing tax obligations. Below are a few highlights from the event.

Minimizing Taxes
Teri Grumski described a variety of opportunities for manufacturers to reduce tax, including the research and development (R&D) credit and the creation of an Interest Charge Domestic International Sales Corporation (IC-DISC). The R&D credit is a non-refundable credit that is calculated based on a company’s qualified research activities. Such qualified activities must have a permitted purpose under the related regulations, be technical in nature and include a process of experimentation. While the result of this trial-and-error process does not have to be successful and does not have to be a product or improvement exclusive to the manufacturer claiming the credit, Teri noted that the process or product does need to be well documented and cannot involve management functions or social services.

For manufacturers that export some or all of their U.S.-manufactured products to foreign countries, an IC-DISC was discussed as a tax-savings strategy to consider. An IC-DISC creates a separate corporation through which a permanent tax savings can be realized. (Read “Getting the Most Out of Your IC-DISC”)

Marc Mazzella discussed other tax reduction techniques, including hiring credits and cost segregation studies. The most popular hiring credit is the Work Opportunity Tax Credit, which offers a credit of up to $2,400 per employee for certain targeted groups, such as veterans, ex-felons and residents of empowerment zones. Manufacturing companies can take advantage of this tax credit with some simple due diligence on individuals already employed. Marc related that having a third-party conduct a cost segregation study on eligible property such as warehouses and manufacturing plants can result in acceleration of tax depreciation and increased cash flow.

Best Practices
Joe Damore, Adam Timblin and Marc Mazzella discussed best practices within the manufacturing industry that often help companies improve profitability. Employee retention and incentive or bonus programs were hot topics, noting that the retention of talented employees is almost always more cost effective than finding and hiring a replacement. To be effective, Adam explained that such programs need to promote specific actions from employees and be closely related to the company’s goals. Research suggests that non-monetary incentives can actually be more effective than monetary ones, since any monetary incentives that are discontinued can often be viewed as a pay cut by employees. Research also shows that the return on investment for properly created incentive programs can be four to five times greater than other capital investments in the company.

Internal controls is another area in which manufacturing companies can improve their operations, as fraud accounts for the loss of approximately 5% of revenues each year in a typical organization. Smaller businesses tend to be at more risk, due to limited ability to develop and implement appropriate internal control processes with small numbers of individuals, and, based on a recent report by the Association of Certified Fraud Examiners, the manufacturing industry is one of the top industries for such losses. Adam suggested that organizations emphasize a strong control environment to help mitigate risk.

Bank lending and healthcare were of course covered as other hot topics of interest to the industry. Manufacturers in attendance were advised to revisit lending agreements with their bankers now that most companies have returned to a state of profitability and have again built a history of positive earnings. On the healthcare front, Marc recommended business owners analyze their companies’ health care costs with their health insurance providers to help determine the cost effectiveness of providing healthcare coverage versus not offering coverage and paying the penalties. However, companies must consider other factors, such as the effect on employee retention or employee morale.

Lease Accounting Changes
Although no final regulations have been issued, Joe Damore summarized the expected changes on the horizon related to accounting for leases. Many manufacturing companies lease equipment, buildings, and vehicles; the anticipated changes in accounting rules could have a significant impact on leases that are currently being accounted for as operating leases not only affecting the income statement. In the future, it is possible that almost all leases with a term of more than one year will be accounted for on the balance sheet like a capital lease. Bankers present at the workshop noted that such a change in regulations would have a widespread and substantial impact on the financial statement requirements and lending relationships, especially for financial covenant ratios. Joe noted that this was something business owners should discuss with their lenders early to prepare for the potential effects.

Cost-Savings and Efficiencies
Adam Timblin discussed the potential for cost savings by having consultants perform an energy audit on a company’s manufacturing plant, warehouses and office buildings. Such an audit analyzes costs associated with utilities, which are heavily influenced by usage and rates, both of which can be influenced or controlled by an organization. Consultants will monitor a company’s usage trends and then recommend opportunities to reduce energy usage and rates. With utility costs being some of the largest expenses of a manufacturer after labor and materials, the savings could be significant.

Adam and Joe also touched on various techniques to increase efficiency of the production process. Their suggestions included a shift to leaner manufacturing, whether it be through six sigma, theory of constraints or other methods; using quality based metrics to determine a business’s success drivers and quantify trends; and the consideration of potential reduction in purchasing costs from the use of buying groups, third-party consultants or negotiations with vendors.

For the full list of 25 Ways to Drive Profitability, contact Joe Damore at jdamore@cohencpa.com or 330.480.4641.

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This communication is published by Cohen & Company for our clients and professional associates. Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.