In episode 01 of The Sound of Automation podcast, Industrial Automation Senior Manager and podcast host Bryan Powrozek is joined by Industrial Automation Shareholder Tim Finerty to discuss the most important industrial automation trends to watch this year. Tim and Bryan talk about managing growth from existence to survival to success and how COVID-19 has impacted the industry.
Podcast Transcript:
Announcer:
Welcome to the Sound of Automation brought to you by Clayton & McKervey, CPAs for growth-driven businesses. We hope you enjoy Episode 1, IA (industrial Automation) Trends for 2021.
Denise Asker, Director Mkt., & Practice Growth:
Hi, everyone. I’m Denise asker with Clayton & McKervey. I just stopped by to check in on my friend, Bryan Powrozek, who is launching his first podcast. So, Bryan, you’ve been an engineer. You’ve tried your hand at being a CPA. Tell me, how did you get into podcasting? Did you just wake up one day and decide to be a podcaster?
Bryan Powrozek, Senior Mgr., Industrial Automation:
I was just really not good at the other two. So I’m hoping this one will stick. But no, I think we’re just trying to find more ways to get in touch with our clients, to try and help share the information we have. Traditionally, accounting firms, it’s articles and blog posts and training sessions, things like that, but the clients we’re working for and trying to find are changing. They’re listening to podcasts. They’re downloading things to their phone. They’re not just going back to the traditional sources that we could reach them through. So the hopes of this podcast is that we can find another way to reach out to them, connect with them and really share some information that will help them better run their businesses.
Denise Asker, Director Mkt., & Practice Growth:
Great. Well, folks, are going to turn into the Sound of Automation and listen to you, our host. I’m thinking they should know a little bit about you. So I have so many stories as your former cubicle mate. I could get into any number of our little exchanges over the years.
Bryan Powrozek, Senior Mgr., Industrial Automation:
I thought we had agreed to—
Denise Asker, Director Mkt., & Practice Growth:
Not do that?
Bryan Powrozek, Senior Mgr., Industrial Automation:
Yes.
Denise Asker, Director Mkt., & Practice Growth
But did we agree to not talk about your mad baking skills?
Bryan Powrozek, Senior Mgr., Industrial Automation:
I do have mad baking skills.
Denise Asker, Director Mkt., & Practice Growth
Yeah, yeah.
Bryan Powrozek, Senior Mgr., Industrial Automation:
That’s kind of one of my ways to let off steam, get in the kitchen, cook… Plus, I love to eat.
Denise Asker, Director Mkt., & Practice Growth
Did you bring any for the group here today?
Bryan Powrozek, Senior Mgr., Industrial Automation:
No, not at all.
Denise Asker, Director Mkt., & Practice Growth
Okay.
Bryan Powrozek, Senior Mgr., Industrial Automation:
But I did bring other gifts. We’ll leave that to-
Denise Asker, Director Mkt., & Practice Growth
The imagination?
Bryan Powrozek, Senior Mgr., Industrial Automation:
Exactly.
Denise Asker, Director Mkt., & Practice Growth
All right. All right. I’ve also heard over the years that you make beer, but I’d never know that because I don’t get invited to your beer tasting parties.
Bryan Powrozek, Senior Mgr., Industrial Automation:
Well, those are very exclusive events, Denise.
Denise Asker, Director Mkt., & Practice Growth
Okay.
Bryan Powrozek, Senior Mgr., Industrial Automation :
You got to reach a certain level within the organization to finally make it there, but maybe next year you’ll make the list and you can attend one of those. Yeah. Again, it’s kind of similar to the whole cooking, baking thing. It’s something that I can do that you enjoy the end product. Even if you make a bad batch, it’s still beer and it’s still good.
Denise Asker, Director Mkt., & Practice Growth
All right.
Bryan Powrozek, Senior Mgr., Industrial Automation:
Yeah. So it’s just a nice way to kind of unwind from all the analytical and number work I do throughout the day.
Denise Asker, Director Mkt., & Practice Growth
All right. So if the Sound of Automation resonates, I can count on an invitation to your baked goods and beer. We all have heard of that now. The listeners have you on record.
Bryan Powrozek, Senior Mgr., Industrial Automation:
I think we’ll probably have to separate those. I don’t know how well-baked goods and beer go together, but-
Denise Asker, Director Mkt., & Practice Growth
All right. Fair enough.
Bryan Powrozek, Senior Mgr., Industrial Automation:
But yes, Denise. You will be invited to the next event.
Denise Asker, Director Mkt., & Practice Growth
Sounds good. We probably should talk for a second about how you spend your day dealing with something called research and experimentation tax credits. So is that another hobby or is that an official part of your role here?
Bryan Powrozek, Senior Mgr., Industrial Automation:
This is the hobby that pays the bills.
Denise Asker, Director Mkt., & Practice Growth
Awesome.
Bryan Powrozek, Senior Mgr., Industrial Automation:
Yeah. So part of my backstory here is that before coming to Clayton & McKervey, I spent about 12 years in the auto industry. So I’m an engineer by training. I developed products for the auto industry for a number of years. As I came into Clayton & McKervey and our guest today, Tim, who we’ll speak to in a minute, was the first one that really kind of approached me about, “Would you have any interest in getting involved in this?” Really, the nice parts of me is it allows me to blend my two areas of study, the accounting and the engineering together, to help find ways to save cash for our clients, cash that they can reinvest in their business, reinvest in technologies, in light of COVID, keep the lights on and keep people working until we get through this whole pandemic.
Bryan Powrozek, Senior Mgr., Industrial Automation:
So yeah. It’s a great incentive, especially for companies who operate in the industrial automation space. If it’s something that they’re not currently looking at, we’ll have contact information within the show notes that they can reach out to myself or really any member of our industrial automation team to find out a bit more about because it’s something that when you look at so many of these things, you’re getting credit for things you’re already doing. So you might as well take advantage of it and find ways to reinvest in your business.
Denise Asker, Director Mkt., & Practice Growth
Sounds good. Well, I think you and Tim have a lot to talk about. So I’m going to sign off here and wish you the best.
Bryan Powrozek, Senior Mgr., Industrial Automation:
All right. Thanks, Denise. All right. Well, Tim, thanks for joining me again today. We got our first kind of episode zero out of the way a little bit ago kind of introducing Clayton & McKervey and the industrial automation practice. But as the practice leader at Clayton & McKervey for industrial automation, I think you get kind of an inside view at a lot of different industrial automation companies and the challenges that they’re up against in how they’re trying to weather, particularly now, the whole COVID pandemic. Some businesses, it’s having a very positive effect. Business is up, a lot of companies are looking at automation as a solution to keep business going.
Other ones have gone through little dips as their customers have slowed down. So really, today, just kind of want to talk to you and get a little bit of understanding on what you’re seeing within the industry, what you’re seeing for 2021. So anybody listening to this, what are some things that they can take and use as they’re trying to navigate 2021? So just to kind of kick things off, what are the two or three top issues that you see industrial automation companies struggling with right now?
Tim Finerty, Shareholder, Industrial Automation:
Well, there’s probably more than two or three. We’re still in somewhat of a pandemic right now and probably are going to be working differently for at least six more months, hopefully, maybe less, but we’ll figure that out. But when I think about this industrial automation segment and in talking to clients, some of those things are really like managing growth from existence to survival to success. It’s no harder this year than any other year. Even though you’re in this COVID and there has been some drop in sales or different things, but there’s still a lot of activity out there. So trying to figure out how that growth is happening. Then when we look at that with the growth is, then how do you manage people?
People is a huge thing. But one of the interesting things that we can talk a little bit more about is now, you might look at people differently. Do they need to be in the same place you are? Can we figure out how to hire people all over the country and still get the work that we need out of them? So I think that there’s opportunities there as well. A couple of other things, we see accounting systems, scheduling systems, trying to figure out how do you make sure that as an industrial automation company, or let’s say, somebody that’s doing engineering work or different things, trying to schedule people. This is similar to our profession. As CPAs, our biggest issue is scheduling, getting people scheduled correctly because it’s billable time or different things like that. So is there ways to help them with scheduling and how to make that easier on them?
The other thing we talked about briefly in episode zero was kind of succession planning, transition. COVID this year, has put some stress on different people too, and more and more people are like, “Well, maybe it’s time for me to be done and figure out how I want to retire or do something else, but how do I transition that business? Who do I transition it to? What are the options out there?” So those are the things that are really out there.
Bryan Powrozek, Senior Mgr., Industrial Automation:
It’s interesting, as you kind of mentioned there, that survival from kind of just existence of the business through growth. If you go out there and Google, there’s all sorts of different business life cycles from startup, to growth, to maturity and sale. But oftentimes when we talk, we talk weekly or sometimes even daily on different clients, you’ve got this idea in your head about takeoff. I guess, what does that mean to you when a company reaches takeoff?
Tim Finerty, Shareholder, Industrial Automation:
Yeah. I think they’ve identified an area that they see really good growth and they’ve made a commitment to that area and focus on that. So you usually, we’re seeing that takeoff when companies are getting an excess of $10 million in revenue. So a lot of these industrial automation companies that we’re dealing with are under $10 million and they’re struggling with what is it that they want to do. A lot of these companies, and over the years as we’ve dealt with closely held businesses, a lot of these businesses are lifestyle businesses. You’re just kind of in it to kind of make sure that, based off of you- [crosstalk 00:09:45]
Bryan Powrozek, Senior Mgr., Industrial Automation:
Pay the bills, just keep things going. Yeah.
Tim Finerty, Shareholder, Industrial Automation:
… you like it, you’re the boss, you control it. So it depends on where you want to go. What we’re seeing though right now, is I got a lot of business owners that maybe started five, 10 years ago that might be in their late forties, early fifties, that really see opportunities for this too, and really once they’re all in, that’s where you start seeing the takeoff. All of a sudden, you’re getting some customers that you’re doing a lot of good work and those customers are coming back to you. Really, it’s a tough thing to think about. Ford talked about it, I think, after the downturn, one Ford, and they were going to use specific suppliers and different things like that. What we found is, yeah, you do a good job. Usually, you’re going to get hired again and the nice thing about companies like this, they’re nimble.
So you can make some changes, you can move things around, you can be aggressive on your bidding and different things like that, and they also potentially understand some of the tax advantages they can take advantage of like we just talked about the research and development credit. If you use that or think about how that could help grow your business, it can be mind-boggling. For example, we have one client that uses some of the R&D credits that he saves on taxes to reinvest in his people, giving bonuses based off of how projects did. You got salespeople out there that get commissions based off of bringing in business, but now, you’ve got engineers, but that if they do a good enough job on the design, build and have that gross profit, the amount that you have to repay back to your employees because of these R&D credits can be significant.
We’ve talked about this before. Federal tax rates are 37%. You can use R&D credits to take your tax rate under 10%, your federal tax rate, their state credits as well. So, effectively, you make a million dollars and instead of paying $400000 of taxes with credits or with federal and state, you now potentially are paying less than $100000. That’s $300000 in your pocket that you can reinvest. So you got to understand how those benefits do that. I think having good advisors by your side that understand the industry is an important thing.
Bryan Powrozek, Senior Mgr., Industrial Automation:
Yeah. Yeah. So to that point, as you’re looking at, my understanding of your concept of takeoff is that a lot of businesses do well and they grow significantly and they’re able to build upon a good idea, but then the ones that really they just go up exponentially and they get the high sell price when the business owner’s ready to retire, what are some of the areas that you see yourself being able to add value and help and help guide those business owners through?
Tim Finerty, Shareholder, Industrial Automation:
Yeah. Again, it gets back to people. Ultimately, at the end of the day when you’re looking at a high sell price, you got to have really good people in the organization because both from making sure that… People and good customers, right? If you don’t have that, it’s going to be hard to get that sell price. You need people that are going to be able to help you make sure that there’s a secret sauce. The benefit of selling a company is when there’s something that you’re doing a little bit different than someone else. In this automation space, there’s no doubt. Everybody is coming up with different ideas of how they do different things to help make ultimately, the business better.
Bryan Powrozek, Senior Mgr., Industrial Automation:
Yeah. Something else you touched on there, kind of the succession planning and transition there’s… I think as we go through the pandemic, we start coming out on the other side, you’re going to see this clear division. There’s going to the people that want out, the boomers who are saying, “Hey, I don’t want to go through that again. I survived. I want to make sure I get the value that I’ve invested into this business,” and then the other side of the folks saying, “Hey, this is a great opportunity for me to add,” maybe it’s a skill, maybe it’s a complimentary service offering that my customers already need. If you could give one piece of advice to both of those camps, what is the one thing that people considering a sale maybe in the next 12 to 24 months and people considering an acquisition in the next 12 to 24 months, what’s the one or two things they should kind of focus on right now as we kick off 2021?
Tim Finerty, Shareholder, Industrial Automation:
Yeah. I think people that are thinking about a sale is they really need to understand where their value is. What is their secret sauce or what is their value that they’re bringing to the table that a buyer wants? We can talk about a lot of different things in that, but I think in this industry, it is one of the industries right now, industrial automation, that people are trying not to acquire. So it just depends on what you’re doing. We have a few clients that have some second generation people in their companies and what they’re trying to do is they’re really trying to change the dynamic of the company. It’s not just trying to do all the work and put everything on QuickBooks.
We’re trying to get into understanding some analytics. What are some of the key KPIs that are out there? I mentioned scheduling, right? How do I better schedule so that I make sure that I don’t have people that I’m paying overtime for and I’ve got people sitting on the bench? Why do I have both of those things? How am I making sure that I’m scheduling things properly? Am I looking at utilizing other industrial automation companies that could help me in other areas? So there’s a lot of different things in there, but I think the key is really trying to figure out what’s going to set you apart. I think when you look at industry 4.0 and some of the things in there when we talk about analytics or artificial intelligence or big data, some of those things are what I think, if you’re already implementing some of that stuff, you potentially have a bigger value out there because you’ve already made that changeover.
So then, other people acquiring… We got a couple of clients that like to acquire and they like to acquire it at cheaper prices and that’s a huge opportunity as well because you do have some of these smaller companies that have great business models, but again, we talked about lifestyle businesses and really have the opportunity to take over those businesses and take them to take off. So that’s where we see a lot of opportunities and that’s where I think even within this podcast long-term, what we’re trying to do is bring people together. Having that network of different companies or different people listening to it and going, “Oh I know this person from California, that now, maybe I should reach out to this other guy in North Carolina that maybe we can work together,” or, “I got a job coming up that’s going to be, especially with COVID and different things, the travel still is being difficult. How can I use others that I know in my network to be able to help me grow and develop over time? Maybe I acquire those people.”
So I think on the acquiring side, using joint venture type things or relationships that you have and using your associations that you’re involved in. We’ve talked about Automation Alley. We talked about A3, which is the Association for Advancing Automation. There’s CSIA, which is the Control System Integrator association. We got the Association for High-Tech Automation- [crosstalk 00:18:23]
Bryan Powrozek, Senior Mgr., Industrial Automation:
Yeah, High-Tech Distribution.
Tim Finerty, Shareholder, Industrial Automation:
… Distribution. Right. You got the society of Manufacturing Engineers. [crosstalk 00:18:30] So there’s a lot of different areas that you can go to and kind of find that, but as well, we’re continuing to try to understand that better too, to help this automation industry, to be able to bring some value to them just through listening to these podcasts.
Bryan Powrozek, Senior Mgr., Industrial Automation:
That’s the interesting thing to me is that we’re kind of the unbiased third party. We don’t do any of this automation work. We just try and help find ways for business owners to do it better. So I know something we’ve had some conversations with some of our clients on and something you mentioned is during the pandemic, especially during the shutdowns, you couldn’t travel. So if you were a company based in Michigan that had a customer in Arizona that needed an install, you couldn’t get your crew out there. So the option is either delay the project or you have to reach out and try and find somebody who can trust who can maybe do that piece for you within the state. So that’s where the strength of these associations come in.
I know we’ve had conversations with other clients of being able to connect with somebody. We’re saying, “Hey, we don’t want to compete with you, but we have a need right now. You have a resource. Is there a way we can work out?” and then we all win. I know you’ve kind of got a vision that’s even bigger than that of, “Hey, I’ve got a really strong controls capability. You’ve got a really strong machine build capability. Can we partner up and get more business and put our people to their highest and best use?” So I see kind of the exciting part of our role as being able to kind of mediate that and play connector between those different organizations.
So this podcast, that’s one of the odd things to me about podcasting is that it sits out there forever. So somebody could come back to this two years from now and listen to this podcast and be like, “None of this stuff applies anymore. Everything’s changed,” but for the folks listening to it in early 2021, what are a couple of trends that you think they have to kind of have top of mind to help them run their business better and really be successful going into the next year?
Tim Finerty, Shareholder, Industrial Automation:
Well, I think as everyone found out in this pandemic, cash. We talk about cash is king and throughout this whole thing, you can see it on the news every day talking about people being unemployed and different things like that. So really trying to figure out how to make sure that they can keep the most cash out there. There’s a lot of opportunities. We recently just did a podcast, which is already aired, for CSIA related to, what can we take advantage of some of the tax acts that are out there? If you’re listening to this come January, you can still do a lot of things. There’s still a lot of opportunities that you can do with the different tax strategies that are out there even after the end of the year, things that you probably just don’t know.
So take a look at that. But I think that the key things too, that you want to do as you’re going through that is focusing on… Our next episode is going to focus on KPIs. So I think KPIs are a huge thing that you look at. In these type of companies, a lot of times, utilization or what other types of things cash is, how do you look at your cash on hand per day? How much do you have of that? Then analytics, trying to use the data that you have better. What are the different types of analytics that you could do from that? You do need to think about probably some of the potential changes with the new administration that are going to be out there and what that means going forward in the future.
Like I said, there are potential tax planning type ideas that you can do after the fact. One of those would be is, if you didn’t know about it, you could change from an accrual basis taxpayer to a cash basis taxpayer potentially if you’re under $25 million. Now, that may or may not make any sense, but it’s something that you can do after the fact knowing that potentially, we might know something in June that the taxes are going to change. So maybe I wanted to create more income in 2020 compared to 2021 because I have lower tax rates, and pay that tax on a lower tax basis than on a higher tax basis.
So those are some things, but I think one of the biggest things that industrial automation companies have to think about, which I know most of them are, but because of this pandemic, we’re not working close together and what does automation do? Automation allows us to have space. So how do we utilize that automation and how do we get the other companies thinking about how they can do it and what they can do? To be honest, we haven’t talked too much about that related from a tax impact, but manufacturing companies, there are other companies that would use automation. If they’re buying that and it’s a fixed asset, we still have, through the tax law, to take full bonus depreciation on all that.
So you, as a business owner, we may not have the manufacturers on this industrial automation podcast, but as a manufacturer, why would I want to automate? Well, I could potentially buy a piece of equipment that I get to finance over five, seven years and financing rates are super low, but I can take that depreciation. Therefore, then I don’t have to pay taxes for a long period of time because I’m using that cash flow to my advantages. So I think it’s trying to understand how do all these things come together and how can I make my company that much better through automation? And getting that out to everybody.
Bryan Powrozek, Senior Mgr., Industrial Automation:
Something you touched on there and I want to make sure we try and get this in before we’re out of time, but we often get this question, “What’s going to happen?” and I think a lot of eyes are going to be on Georgia come the runoff because how that Senate election goes could either help or hinder what Biden’s able to do from a tax perspective. But there’s one thing that they can focus on right now that is current law that will help them. Can you just touch on the way that you’ve been advising clients about the NOL carryback provision within the CARES Act that it opens up a lot of doors in our conversation?
Tim Finerty, Shareholder, Industrial Automation:
Yeah. So I think one of the biggest things is going to end up being whether or not this current stimulus package gets passed, which it’s supposed to be voted on here shortly. But in that package, it talks about the PPP loans being forgiven, or the tax deductibility of the expenses. So right now, most companies are adding that back to income. When we’re doing tax planning right now, a lot of, because of the PPP loan, they’ve made money because that came back as income in theory, the expense is not being deductible.
Now, if those become deductible, it could create a potential big loss. Let’s just say you got a $1.3 million loan and right now, you’re showing $600000 of income. If that $1.3 goes away, now you’re going to show $700000 potentially of loss. That $700000 now can be carried back five years. So for 2020, go back to 2015. If you made some good money in 2015, you were paying at basically 39.6%. So on that $700000, you’re going to get 40% of that or almost $280000 back just by having that NOL in the current year. That’s something that a lot of people aren’t going to be thinking about right now, because of potentially, the PPP loan, basically that the expense is not being tax-deductible.
Bryan Powrozek, Senior Mgr., Industrial Automation:
Yeah. Then you get that, something you talked about earlier, you get that tax refund, which now offsets some of the costs of that automation system that you invested in to generate the NOL. So it’s something that people need to be thinking about if they haven’t had that conversation with their tax advisor. Make sure you’re discussing that as you’re planning out for your 2020 taxes because there’s a lot of ways to try and free up some cash as a result of things that have happened over the last year.
Tim Finerty, Shareholder, Industrial Automation:
Yeah. That’s especially true. You talked about getting that money back and paying down or using for the automation system or different things like that, but the other area that you could look at is it gives you some cash so when you’re bidding on jobs or different things like that, you can have that ability to say, “Okay. I don’t need to have as much upfront. I can be a little more aggressive on my terms,” different things like that. So it gives you more options. As we talked briefly, cash is kind. When you have cash, you have more options to look at how you’re going to bid jobs, do different things, be aggressive on what you want to take, hiring people. I know that a lot of people that have taken some of this money have looked to grow their talent and it gives them an opportunity to potentially do that because you got some of that money to be able to go out there and really find some good talent that you know that there’s business coming in the future.
Bryan Powrozek, Senior Mgr., Industrial Automation:
Excellent. Well, Tim, I appreciate you taking the time to sit down with me here today and go through some of these things. We’re only in our second episode here and it’s already blurring together. I can’t remember if I mentioned it the first one or this one, but my goal for everybody is that they find one thing that they can take away and make their business better. So for the listeners out there, if you heard something on this podcast we’ve got a limited amount of time that we can cover these things, we can’t go into great detail, but if you heard something on the podcast that interested you, but you’re not quite understanding of it, our contact information will be in the show notes. Feel free to reach out to myself or Tim, or really, any member of our automation team here at Clayton & McKervey and we’d love to talk to you. Tim, thanks for coming in.
Tim Finerty, Shareholder, Industrial Automation:
Great to be here.
Announcer:
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