Weathering Tight Margins

Donna Funk with K-Coe Isom shares five tips for weathering today's tight margins. The drivers are different, but the things that worked during previous periods of low margins still apply, she says.
By Donna Funk | May 12, 2015

About 12 months ago, I shared the importance of following good margin management practices, even in profitable times. Based on past trends, I encouraged you to anticipate and prepare for the next economic shift.

Well, that shift is here. You know that ethanol margins have declined. Today's environment is basically the opposite of last year. Instead of high gas prices and low corn costs, we face falling crude-oil prices and fluctuating corn costs.

Hopefully, you took my advice last year and implemented best practices. For example, some of the ways ethanol producers I work with leveraged the strong economy included:

• Increasing capital purchases.
• Improving cash reserves.
• Restructuring debt.
• Reducing debt above the scheduled amount.
• Making distributions to investors.

These producers took advantage of record profits to create a financial cushion. If you didn't, or the padding isn't quite where you'd like it to be, there's still hope. But you have to be diligent.

Now that margins are tighter, it's even more important to run your business efficiently. Financial data is essential to making good business decisions. Based on years working with ethanol producers, here are five tips to improve profit margins through financial management:

1. Employ the capital equipment invested during the last year
to introduce new revenue streams or more efficient processes.

2. Use cash reserves to pay interest and principal on debt or
pay off loans entirely.

3. Focus on production efficiencies. Take time to review all
the steps within your production cycle. Concentrate on small,
incremental savings. Encourage employees across your entire
organization to look for savings and share efficiency ideas.
Then, commit to evaluate all suggestions, executing on those
that make sense. This also fosters a continuous improvement

4. Master margin management. Take steps to control expenses
and maximize sales. Pre-buy when costs are lower. Purchase
comparable resources at reduced costs, provided they meet
your quality standards. Make sure you understand your cost
structures and break-even, not only direct costs, but fixed and
overhead costs, too. Compare actual costs against your budget
and calculate your break-even. How much do you have to
sell to get a return on your investment? Different prices, input
purchasing programs and even varying philosophies can
greatly impact expenses.

5.    Maximize operational efficiency. By evaluating both
production and cost efficiencies, and implementing small
changes in each, you will realize a higher overall return.

This isn't the first time you've experienced this kind of economic cycle. The drivers are different, but the things that worked during previous periods of low margins still apply. You can be financially successful if you implement the tips above.

For help weathering today's tight margins, consult with your financial services partner.

Author:  Donna Funk, CPA
Principal, K-Coe Isom