The pressure is on.
Sales is forecasting a big jump.
Your team is overloaded.
A limited-time offer is about to expire.
And you are staring at a $300,000 quote.
Is it the right time to say yes?
To invest in a second machine?
To take things to the next level?
There’s a danger in buying too early.
If you’re wrong and your company is not ready, this kind of investment can sink your whole business. Working capital is a critical resource to keep your business running. If you bet wrong and wreck your cashflow, this could be the end.
So, how do you know it’s the right time?
Manufacturing CapEx Checklist:
Here’s 5 questions you should ask:
1. Do you know your job-level profitability?
If you can’t break down your profit by job, line, or SKU then there is no way to know if a second machine will help or hurt. High volume doesn’t necessarily mean high margins. If you have a product that is eating into your profit, making more of it will only cause bigger problems.
2. Do you understand your overhead costs?
Create a system to properly allocate overhead costs—things like rent, utilities, indirect labor, maintenance and repairs—so you can get a real picture of your margins. If you are not considering overhead costs, you might invest the $300K and not make a penny out of the deal!
3. Can You Cash Flow it?
Many companies use a rolling 13-week cash flow model that is constantly updated to show them a fairly accurate prediction of their future cash flow. A tool like this can also be used to model different scenarios. For example, you can factor in your assumptions about the new machine and see how it plays across the entire business. In real time! This is critical to avoid nasty surprises.
4. Are Your Systems Ready?
Does your factory run like, well, a factory? Without documented processes and procedures or “SOPs” you might come to the horrible realization that while everyone knows what they are supposed to be doing, they can’t explain it to a bunch of new hires at once. Suddenly, the floor becomes a scene of chaos and pandemonium as the process falls apart left and right. Make sure everything is systemized before you scale, so operations ramp up without a hitch.
5. Most Importantly: Are You Solving the Right Problem?
Time for a real gut check. I’ve had many clients chase new sales, ramp up production, or other exciting opportunities only because they are avoiding the real problems.
If there are cracks in your foundation, no amount of scaling will solve it. It will only topple the whole building on your head. I won’t sugar coat it. Some issues may be hard to face; you might even be the source of some of the biggest obstacles! But it won’t go away if you ignore it. Have the courage to confront these issue head on. Once you shine a light on these dark corners, you’ll find they are not so scary after all. Knowing the disease is half the cure.
Now, after that TED talk, let me get back to the point: what problem are you trying to solve? If the problem is efficiency and you’re solving for capacity, the math will not add up. More equipment won’t fix a broken process.
Start With the Numbers
Gut instinct is a powerful tool for business leaders. But when it comes to big purchases you must first have the best possible options with the available data.
Which means you need the best data available.
With clear numbers, strong processes, and insightful forecasting, you can be sure you are signing off on the right solution to the right problem. Instead of cutting the check and counting sheep, your investment will feel like the obvious next step for the business.
So, if you’ve got solid answers to these 5 questions, then go ahead, because now you know what you’re saying yes to!
