A strong balance sheet = A strong business

August 15, 2014
By: Dan Davis

Metal fabricators are a conservative lot, but that can be a very good thing, especially in light of the unpredictable times in which we live.

I was chatting with a fabricator several weeks ago, and as he began to describe the company’s financial position, he paused. He wasn’t worried about exposing details of a risky balance sheet; he was a little embarrassed by how healthy the company’s cash reserves were.

That’s just how the business partners, of which this metal fabricator was one, wanted to run the business. As he described it, the savings are a hedge against the unpredictable world in which fabricators have to compete. Before Sept. 11, 2001, $1 million in cash reserves used to be considered adequate. Before the Great Recession of 2009, $2 million was looked upon as being enough. As the volatility in the world increased, the cash reserves did as well.

This is not that unusual for the metal fabricating industry. Business owners in general are a conservative lot. Risks they take typically are well-researched and likely to succeed. They aren’t buying a lottery ticket and hoping for the best.

In the Fabricators & Manufacturers Association’s “Cost of Doing Business Survey” from 2009, the top firms reported an average operating profit of 22 percent. For the top quartile of participants in the survey, cash represented just over 14 percent of total assets. And that survey was done just before the economic downturn that some believe still lingers today.

Some business consultants might argue that the cash should be put to work to grow the business, but I’ve seen the road littered with too many businesses that chased expansion for the sake of growing and not for the sake of being a better provider of metal fabricating services. The strategy that was successful in building a business works well for growing one as well, even if the timetable may not be fast enough for some people.

In the end, this case of maintaining cash reserves makes sense for any fabricating business that’s been through a downturn. When things get bad and a shop needs money to survive, is the bank going to extend favorable lending terms? No. Banks are hesitant to lend money to manufacturers even when times are good.

If a metal fabricator has survived the last two economic downturns, it has a good idea of how to sustain success. Sitting on a wallet is not a bad thing.

Dan Davis

Dan Davis

FMA Communications Inc.
2135 Point Blvd
Elgin, IL 60123
Phone: 815-227-8281