Margin Pressure Is the New Normal: How Manufacturers Stay Profitable

“As soon as you’re in tune with your costs, you know when there’s a problem.” — Kevin Golden, CPA, James Moore & Company

In this James Moore Live episode, Kevin Golden joins host Faith to break down why margin pressure has become a constant reality for manufacturers, where hidden costs are quietly eroding profitability and what leaders should be watching to protect cash flow.

Kevin covers profit leaks like scrap, overhead creep and misallocated labor, explains how inventory strategy ties directly to cash, and makes the case for why better financial visibility is one of the strongest competitive advantages a manufacturer can have.

From the cash conversion cycle to pricing strategy in a volatile tariff environment, this episode is packed with practical insight for manufacturers at any stage.

Resources

• James Moore Manufacturing Industry Page
• Moore on Manufacturing YouTube Channel
• Watch the Full Episode

Full Transcript

[00:03] Faith: Hi everyone and welcome to the James Moore channel. Today we are here with Kevin Golden. Hi Kevin, how are you?

[00:07] Kevin Golden: I’m doing great Faith. How about you?

[00:09] Faith: Good, good. Happy Monday. So today we’re talking about margin pressure is the new normal and how manufacturers are trying to stay profitable. The first question is why does it feel like margin pressure is constant for manufacturers right now?

[00:22] Kevin Golden: Well, no one wants to ever say, “I made less money this year than I did years prior.” If I make an investment, things like that, that’s understandable. But simply the fact that we’re less profitable is not usually a great answer that most people want to hear. So I think just from a pure aesthetics standpoint, everybody wants to continue to remain on those margins. Why? To keep up profits. Continue doing better. We usually correlate that with growth.

[00:55] Kevin Golden: Also, there are a lot of other costs that continue to accelerate. Look at labor. Manufacturers have a lot of labor, and that continues to tick upwards. So there’s even bigger pressure where maybe you could cover up costs here or there with good margins. As those costs continue to rise and industries continue to tighten down on pricing, those margins become more pertinent to hit. Otherwise, you’re not making money, you’re losing money. A lot of it goes back to overhead and labor, things like that that sneak in there. You can’t really cover up these increases. They can only be maintained by hitting those numbers you need to hit, hitting those margin dollars.

[01:48] Faith: So where are companies underestimating the true impact of rising costs?

[01:52] Kevin Golden: Well, one, I think some of the answer is they just flat out don’t know what those costs are. Most of them can tell you what their materials are and how those are doing, but what about all the other costs associated with manufacturing? There’s a lot more than just raw materials in your product. Some of these other costs kind of creep up on them. We know labor is a big one, but I had a manufacturer recently where their scrap had just gotten out of hand. It wasn’t that it appeared one day when it wasn’t there previously. All manufacturers have scrap, but the amount of scrap relative to how much they were producing just didn’t make sense. Things like that are what I call profit leaks, where some of these costs just kind of sneak in and become larger than you think because you probably just don’t think a whole lot about them. Scrap is one perfect example of that.

[02:44] Faith: What are the biggest hidden margin killers you’re seeing right now?

[02:47] Kevin Golden: Probably some of those profit leaks I just talked about. Overhead is one. When people look at their inventory and pricing models, they take into account raw material and the person working on the assembly line, but they don’t take into account all the people or costs that indirectly touch that product. So their margins may even look great, but by the time they take out their overhead, they’re not right where they want to be, or maybe their cash flow isn’t right where they want it to be. Some of those profit leaks can look like scrap, rework and inefficiencies, but it can also look like overhead costs that have silently grown, that maybe you just haven’t paid as much attention to. You’re so focused on how you make your product, whether you’re doing it well, whether you’re selling the units you need to sell, that you’re not paying attention to all these other costs that are just silently chipping away. A lot of it goes back to overhead and the indirect costs that indirectly impact the product you’re making.

[03:58] Faith: Have you ever had someone come to you and you uncover something big that they were totally missing?

[04:03] Kevin Golden: Yes. Most of the time it’s just not being aware of the ripple effect of everything that touches your product. I had one recently, a manufacturer, and this is a pretty straightforward one. They were just not taking labor into account. Some of that is because they had several people doing several different jobs. It gets mixed up between, well, I’m not just sitting there every day making this widget. I may be making the widget, then part of the day I’m selling, part of the day I’m dealing with vendors, and then part of the day I’m working in the office on administrative tasks. They had multiple hats because they were a small outfit. So some of those roles got jumbled up, and they weren’t taking into account that maybe 25% of their time they were actually helping make those products. They weren’t covering their costs as well when they went out to price things. They thought they were making X margin, but it was really Y because of all these other costs not being taken into account. It’s just about being very diligent about what those costs are and having a revelation about what you are or are not taking into account, whether it’s in your pricing model, your expectations for the year or your cash flow models.

[05:17] Faith: And I feel like even more so now, people are going to be wearing different hats and doing multiple jobs and tasks. So I think that’s something to actually think about. What financial metrics should manufacturers be watching weekly, not monthly?

[05:42] Kevin Golden: To me it’s anything that really impacts your cash conversion cycle. What is that? It’s from whenever we go out and spend money to buy raw materials all the way until it turns back into cash. It goes through the whole cycle of raw materials, then work in progress, finished goods, accounts receivable and then cash back in the door. Now we start the cycle all over again. Anything that really impacts that, you should be paying attention to regularly, because it takes a lot of cash and capital to run a manufacturing company, from the people to the materials to all of that. That means tracking how long your inventory is outstanding, how long it takes for that inventory to sit until it’s sold, your payables outstanding and your accounts receivable outstanding. All those things that impact cash, because probably some of the biggest stressors manufacturers feel is around cash. Anything that impacts that should be tracked regularly. Sometimes even daily depending on the size of the operation, but at least on a week-by-week basis.

[06:59] Faith: What should leaders be thinking about when it comes to pricing in a volatile cost environment?

[07:04] Kevin Golden: Well, I think the knee-jerk reaction, whether it’s coming from their financial advisors or themselves, is just to increase pricing. And that may be warranted to an extent, but at the same time you’re going to get pushback in your market, in your industry, in your niche of manufacturing. Maybe you can’t do that because of competitors. So you’ve got to really tighten up other ways. Some of that is just being aware of all the different levers that really impact your bottom line. As a leader, it’s understanding how any tweaks operationally, whether a price increase, a cost reduction or improved efficiency, impact where you’re trying to get financially. I think a lot of people just think of pricing or just the cost. Go back to my scrap example. Just noticing that scrap is higher than expected, then asking why. Maybe you’re throwing away material that could be repurposed or reused. Maybe the people working on that line just don’t understand the real cost impact of what they’re doing. Asking those types of questions could help you be more profitable without increasing your pricing at all. But then again, pricing sometimes needs to be taken into account, especially with the tariffs and everything. Understanding, when those costs come into play, what is your volatility? How much could you potentially pass on to clients before you lose out? Being aware of where those boundaries are matters. You can push prices up to a point, but you can’t pass on 100% or you’d lose out in the market.

[09:10] Faith: That kind of ties in with the next question, which is where does inventory strategy play in protecting cash flow and margins?

[09:18] Kevin Golden: Inventory is just cash sitting on a shelf. If you want to put it very simply, that’s what it is. The longer it sits there, the longer before you can get that cash back and do something else with it, whether that’s buy more inventory, make investments or whatever it may be. Stay away from the extremes. Way too much inventory because you’re nervous or you got a great discount on it, okay, but did you actually use that discount to its fullest capacity? Or did you buy so much that now you have way too much? Now you have inventory that’s obsolete and you have to get rid of it. Good intentions, bad result. Inventory management is something you should probably be looking at on a week-by-week, even day-by-day basis. You’ve got to be really in tune with your supply chain and the relationships on that supply chain to know how quickly you need to get inventory in, as well as the demand going out. When things don’t go the way you planned, when you had to throw away inventory or delay a delivery by two weeks, ask why that happened. Constantly doing a kind of post-mortem on what went well, what didn’t and why, and then making those tweaks.

[10:48] Faith: How can better financial visibility actually become a competitive advantage?

[11:08] Kevin Golden: It ties back to knowing what your boundaries are. Having better financial visibility will help you protect yourself against the what-if. What if you want to grow? What if your orders become so demanding that you need to double production? Well, if you make twice as much as you’re making now, will you make twice as much money? Having finely tuned financials are going to help you understand what that looks like. And even better, in a market that takes a downturn like 2008 or COVID, it helps you pressure test. How long can we go until we’re really in trouble? What if our orders got cut by a third? Do we have to lay off a third of our people? Hopefully not, but how can we prepare against that? You can pressure test yourself when you have really good financials. When you don’t, it’s a shot in the dark. You may be working off of good data and making good decisions, or terrible data and making terrible decisions. Good financials help you plan for the what-if. What if things go well? What if things go badly? What if tariffs come back at a much higher amount? What changes do I have to make? How do I pivot? Good financials will be a part of that solution.

[12:54] Faith: What separates manufacturers who are maintaining profitability from those that are struggling?

[13:00] Kevin Golden: I think one of them is having leadership that’s invested in running the company. You hear this saying, don’t just work in the company, work on the company. There’s a lot more to it than just knowing how to make your product. Sure, maybe when you were a brand new startup with five employees, that would probably be okay. But as you’ve grown, especially if you’ve had a family company around for 30, 40 or 50 years, there’s a lot more to it than just, can I make my product really well? Can I manage other people to do the same? Can I rely on my vendors? There are a lot of personnel issues and things that go into it. Those that do well spend the time to really work on their business and run it, in addition to knowing how to manufacture their product. And they’re honest about what they don’t know. I’m not an expert in everything in accounting and finance. There’s just too much in there. So surrounding yourself with people who have strengths where you have weaknesses, and vice versa, helps you take the next step toward your vision and goals, whether that’s growing at a certain percentage or hitting a certain rate. More people who are in tune with that, and can admit to it rather than trying to do it all themselves, are going to find themselves more successful most of the time.

[14:48] Faith: I know you mentioned multiple things people can do to be proactive. The last question today is what’s one move manufacturers should be making right now to protect margins?

[15:06] Kevin Golden: Be in tune with your costs. I know that sounds really simple, but one question I’ll ask a manufacturer is, “Hey, what’s your profit margin on that widget?” And when I look at their financials and compare it to what they thought they were making, they’re completely different. I don’t know which one’s right. Maybe their gut is right, but that’s what they’re making decisions on. Or maybe the financials are right and they think they’re making a lot more than they are, sitting there scratching their head wondering why cash isn’t where it needs to be, why they always feel like they’re struggling. Being in tune with your costs means not only being aware of all the costs that impact you and how they impact what you make, but making sure your financials reflect that. So when you actually look at that data, it’s real data, not made-up numbers because you have incorrect assumptions in there. As soon as you’re in tune with that, you know when there’s a problem. Profit margin slipped by 5%. Why? Simply asking that question and looking at that constantly will help you unravel where you’re leaking. Oh, I didn’t realize this cost had gone up that much now that we’re producing at this volume. Okay, we need to adjust for that moving forward. There’s no one answer to that, but if I had to simplify it: be in tune with what’s normal, where you want to be and what those costs really are, so you’ll know when they deviate, whether for the good or the bad.

[17:00] Faith: And I think people need to remember that if you throw something into ChatGPT, it usually tells you what you want to hear.

[17:06] Kevin Golden: That’s true. That’s why going to an expert and having sound advisors is crucial to everyone’s success. It’s like anything else. It’s a great tool and there are going to be a lot more cool tools technologically, AI and all that, to come. But it’s a tool nonetheless. It’s not you, the business owner.

[17:36] Faith: No, absolutely not. Well, it was great talking to you today, Kevin. I can’t wait to have another episode with you.

[17:41] Kevin Golden: Absolutely. Thanks, Faith.

Watch the Full Episode

If you found this conversation useful, watch the full James Moore Live episode with Kevin Golden for more on protecting manufacturing margins, managing cash flow and building the financial visibility your business needs to grow.

Watch now on YouTube.

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