Industrial Automation Companies

Year-End Planning Insights

Posted on November 3, 2021 by

Clayton & Mckervey

Clayton & McKervey

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The Sound of Automation

In this episode, we sit down with Clayton & McKervey Shareholder Tim Finerty to discuss important year-end planning insights for business owners. Learn about the biggest issues impacting businesses today including supply chain issues, labor shortages, cybersecurity threats, and potential tax impacts.

Despite the uncertainty of the next 12 months, it’s important to put yourself in a position to be agile. Discover how to navigate the changing marketplace, capitalize on opportunities, and set your business up for success next year.

Announcer:

Welcome to The Sound of automation, brought to you by Clayton & McKervey, CPAs for growth-driven businesses.

Denise Asker,  Director of Mkt. & Practice Growth:

Good morning, Bryan.

Bryan Powrozek, Sr. Manager Industrial Automation:

Hey Denise, how are you?

Denise Asker:

Good. How are you today?

Bryan Powrozek:

I’m doing well.

Denise Asker:

Great. Well, the leaves are falling on the trees, and it looks like you’re setting up a conversation to look at what we should be focusing on the end of year.

Bryan Powrozek:

Yeah. Yeah. It’s that time of year when business owners are trying to forecast what’s going to happen for the next couple months to close the year out. And then what do we want to start doing next year to really set ourselves up for success? So we figure it was a good time to get in, talk about what we’re seeing in the economy and the markets and try and provide some insights that business owners might be able to use at as they go through that process.

Denise Asker:

Great. Well, big picture, are you feeling optimistic, pessimistic or somewhere in the middle?

Bryan Powrozek:

I find it hard to not be optimistic, at least when you look at our client base and how they fared through the pandemic. There were some blips and personnel issues, things like that. But for the most part, most of our clients made it through the pandemic pretty well, thanks in part to things like PPP and ERC and things like that. But for the most part, they had some pretty strong years. So if you can make it through a situation like that with a strong year, and nobody’s got the perfect crystal ball to say what’s going to happen in 2022, but all indicators are still growing, maybe slowing down a little bit, but we’ll still see growth for 2022. It’s hard not to be optimistic.

Denise Asker:

Good. Well, I’m looking forward to hearing you talk to Tim about that. Before I leave you, is there one piece of advice that you would set up our listeners to be listening for?

Bryan Powrozek:

I think the biggest thing is, and you could say this really at any time, but there is so much uncertainty with what the next 12 months could look like. You could get another variant that kind of throws everything off back into what we saw in ’20. So there’s just uncertainty. There’s always uncertainty in the business market. So make sure whatever you’re doing, and we touch on this a bit when Tim and I talk, is you’re putting yourself in a position to be agile and to adjust. Don’t just set your strategic plan today and then dust it off 12 months from now to see how you did.

Denise Asker:

That’s a good point.

Bryan Powrozek:

You’ve got to keep focused on it. You’ve got to be willing to adjust as conditions adjust in the market to make sure that you’re making the most of the opportunities that present themselves to you.

Denise Asker:

Sounds good.

Bryan Powrozek:

Excellent. Thanks Denise. Hello, and thank you for joining us again at The Sound of Automation podcast. Joining me today, again, is probably my most favorite guest here, Tim Finerty, at least the most frequent guest here on the podcast. But Tim, how are you doing?

Tim Finerty, Shareholder Industrial Automation:

I’m doing great. Thanks for having me again, Bryan.

Bryan Powrozek:

Excellent. So today we’re going to be checking in and just looking at what you’re seeing and hearing in the market right now economically for the fourth quarter 2021 and even into 2022 to try and help business owners plan for the year end as well as put some thoughts into their strategic plan for 2022. So just really high level, what are you hearing, what are you seeing? What are the main things that business owners should be looking for?

Tim Finerty:

Yeah, I mean, it’s really interesting out there right now. Again, we’re still dealing with supply chain issues. I was out in Napa this past week celebrating my 50th birthday, and as I was driving up from San Francisco to Napa, again, you see within the ports the supply chain issues. You’ve got boats that are just sitting out there. Los Angeles has got over 50 ships that can’t debark. So getting supplies to the customers or to our clients is still very difficult.

Tim Finerty:

The planning is very, very difficult. Again, trying to forecast what you’re going to be able to do, how you’re going to be able to do all that stuff is difficult and timing of when you’re going to be able to ship stuff. So the planning is the most difficult thing that we see out there right now.

Tim Finerty:

From our standpoint, clients are doing pretty well. The economic, both PPP2 helped quite a bit as well as the ERC, but right now we’re in limbo because the Congress and President is trying to pass a $3.5 trillion infrastructure bill that’s got a lot of interesting things still in there as well to help our clients. So, it’s definitely interesting.

Bryan Powrozek:

Yeah. With a lot of those uncertainties, as you mentioned, the programs that were put in place to try and help business owners get through everything are expiring over the next couple months here, and there really doesn’t seem to be any plan to replace those as hopefully we move past the pandemic. But then there’s still a lot of uncertainties. There’s labor uncertainties, there’s supply chain uncertainties, economic growth, what’s going to happen there over the next 12 to 18 months. So how do you advise a business owner in those types of uncertainties, and what are the things that you try to look for?

Tim Finerty:

Yeah, that’s a difficult question because again, those uncertainties, we’re not sure of. So, take for example, I’ve got a client that’s got probably about a $20 million backlog in their business and they’re, let’s say, a $15 million client, so that’s a year-and-a-half backlog. But the timing of when that’s coming on board because of labor shortages, trying to find people is difficult, and what they’re trying to do with that is create some automation. Create in their plant on some of those big machines is automate those machines and using some of our industrial automation clients to help them integrate those machines to make them faster and easier to work with. But that takes time, and then that takes capital. And then that capital, how do they get that capital? They’re using some of that capital from what they got from potentially from PPP or the employee retention credit. But the employee retention credit, the timing of when you get that money back with how the IRS is working, you’re not getting it immediately.

Tim Finerty:

Then you’re trying to go to the banks and get some of that stuff, and they’re having a hard time trying to understand how your financials are looking. We were just working with one of our clients and ended up finding out that over the last year-and-a-half, they funded about $2.5 Million worth of their own capital equipment, and really has been put on somewhat of their working capital line of credit. Then as the bank’s thinking about it, they’re like, “Well, why are they using the working capital line of credit? “Well, they didn’t have the time to go to the bank to get a equipment line of credit or get new capital on the equipment.

Tim Finerty:

So now we’re backtracking. Instead of being able to be proactive, we’re being reactive, and we’re trying to now get more proactive. I think that’s the biggest thing that we’re looking at and trying to help our clients with is getting more proactive, trying to use data. We talk about the labor shortages, but so how do we become more data driven? And be able to pull that data out of information quicker and to be able to use that data, both for customers as well as trying to get with the bank.

PART 1 OF 4 ENDS [00:09:04]

Tim Finerty:

With our relationship with the bank. How do we get more money from the bank to be able to grow? Because there’s huge opportunities right now, right? And I think when you really sit back, because there’s labor shortages, this automation, automating a lot of processes, I mean, even internally at Clayton & McKervey, we have labor issues and trying to find enough people and different things like that. And so you’re really looking at how do you make things work better? And some of that is technology, right? And trying to figure out what technologies can you do. And the hardest thing is you’re going to try some and they’re not going to work, and then you’re going to have to try some more and hopefully those, those will work.

Tim Finerty:

And so it is tough out there, but I think we’re all learning and getting better at trying to figure that stuff out.

Bryan Powrozek:

Well, and what’s interesting to me about that example you mentioned about the capital equipment, right? Is it just underscores the importance of pulling in the right business partners, the right advisors to help you in those times. And it’s no doubt, I mean, the company was just trying to do what they thought was best and said, “Hey, we need this equipment,” or, “We’ve got the opportunity to buy this equipment, let’s do it, we got this line of credit here,” but now, as you said, we’re trying to backtrack and work with the bank and pull those things out. I know it’s hard in these uncertain times to stop and take that breath for a minute and say, “Hey, wait a second maybe we should talk to,” whoever the advisor might be.

Bryan Powrozek:

Depending on the situation, you talk about labor, that could be talking to someone in the HR arena that knows recruiting and retention and can help you put a plan in place to help try and protect your workforce, reaching out to your accountant when you’re talking about financing, something like that, who can just easily say, “Oh, hey, let’s just go back to the bank and talk to them about getting you a capital loan or something to finance those things.”

Bryan Powrozek:

So it really underscores the importance of not rushing into a lot of these things. Take that second, think it through, bring in somebody from the outside that can kind of give you that third party perspective. And then you may still end up going through with whatever you thought about, but at least you’ve taken that stop for a second to kind of refocus and make sure you’re not getting yourself too far down a path that now you can’t get out of and you’re kind of stuck with the decision you made.

Tim Finerty:

Exactly. I mean, there’s no doubt about that. And I mean, there’s a lot of things going on and I think we’re going to probably get into that a little bit more, but when you’re thinking about it right now, some of the other stuff, you got labor shortages, but one of the big things that’s out there is with this new infrastructure bill, there’s stuff talking about how some tax changes are happening, right? And with that comes some potential increases in taxes. So from that, there’s been a lot more activity still with potential private equity or people wanting to sell or look at getting out. And it’s amazing to me still the amount of money that is out there that is being thrown around and opportunities for our clients or other clients to really look at is there a way of what I’ve built to expand and bring in investors, get out.

Tim Finerty:

We talk about the labor shortages and that’s part of the issue of we got all the baby boomers and different things like that retiring, right? I think I mentioned probably on the first podcast that we had that basically we have about 10,000 baby boomers retiring every day, right? And how do you keep getting into new labor, new people into the market? You don’t have enough of them. And so it’s talking about the technology and the other things that are out there, and how do you continue to focus on how you build a business?

Bryan Powrozek:

Yeah, you touched on something there that’s probably, I would guess, is probably, at this point in time, probably one of the most common questions we get it from clients is taxes, right? What’s the Biden administration going to do? We see things in the infrastructure bill. The head of our tax department, Sarah Russell, she seems to be putting out an article every week saying, “Here’s what we’ve learned so far. It’s still changing. You got to stay on top of these things.”

Bryan Powrozek:

So what’s your gut telling you about what business owners should think about for taxes going forward? I think the underlying assumption is things are going to go up, right? It’s a question of how high and where and what, but what are your thoughts in that area?

Tim Finerty:

Yeah. I mean, they’re definitely, based off of what we’re looking at, taxes probably are going to increase, so trying to take advantage of certain things that are out there right now. I still think that there’ll be incentives for a lot of different things. You’re looking at solar incentives, you got R&D credits, which we do quite a bit of work with that we hope gets a fix that really will help incentivize some stuff. You still got the depreciation type stuff that’s going to stay out there. I do think that the qualified business income deduction will stay for a little bit hopefully.

Tim Finerty:

And I think hopefully what has helped, and I’ve talked to quite a few of my clients with respect to the PPP again and the ERC, those credits that were out there have provided some great capital into the business, right? And so, because of that, now they can invest in a lot of different things or look at investing in a lot of different things.

Tim Finerty:

I still think a huge, huge issue out there is going to be cybersecurity. It’s funny, I watched some shows with my wife during the week and different things, some of the TV shows, and the initial ones of the season openers, there was about four of them that we were watching and every single one of them touched on cybersecurity, how there’s cyber hacks happening all over the place. And it’s a huge issue that’s out there and what are people doing, both just internally within their regular day-to-day work, kind of the back office, but what are they doing with the front office on the floor? The manufacturing of your machines? If somebody can hack into a machine that’s running parts and create parts that are not proper and basically throw you off and use all your raw materials and not creating the right product, it’s a huge issue.

Tim Finerty:

So cybersecurity I think is one of those things that people think about all the time, but I don’t know that they think about it the right way. And so I think there’s lots of opportunities there.

Bryan Powrozek:

Well, and especially when you, when you think about the industrial automation companies themselves. As you mentioned, okay, let’s just assume whatever the increase is going to be, there’s going to be some sort of tax increase, but another major focus for the Biden administration as well as prior administrations is American innovation and that’s the R&D tax credit. I know that Biden has some other proposals of how to try and encourage innovation here in the US. And so a lot of these, whether it’s a system integrator or a robotics manufacturer, whatever it might be, a lot of those companies are the ones driving that innovation, at least as it relates to the operation space and how do you take a manual process and automate it so we can be competitive, especially if China continues to rattle its saber and we’ve got to find ways to restore some of some of this manufacturing and that is bringing manufacturing back to the US is one way to solve some of these supply chain issues. Now we’re not waiting on freight coming over. So there’s going to be a lot of opportunities for automation companies, integrators to maybe expand their portfolio. I mean, we were talking with another business owner a couple weeks ago who said, yeah, our discreet automation solutions, we see there’s less and less of that in what we’re being proposed on, but we’re coming in and doing specific jobs and maybe it’s cyber security, maybe it’s MES integration, whatever it might be like, those are the opportunities we’re seeing. So now they can take advantage of some of those federal programs because they’re investing in their business and growing it and going into new areas for them, which would potentially be R and D credits, maybe some other programs that come out as a result of these tax opportunities that are coming up. So I think that’s kind of the exciting part to me to look at it is that it’s in a way not just maintaining business as usual trying to grow and advance.

Tim Finerty:

Yeah. Again, exactly. You mentioned talking with a client a couple weeks ago, one of those clients asked us what should we do with some of the cash that we have on hand, and that’s an important thing. So it’s because of these programs that have helped some of these clients over the last year and a half, there is some cash on hand and really have created some equity into the business. How do you use that cash correctly to grow your business? And that’s the important part. And I think you got to make sure you take that step back and really think about how are you going to use that. Because there’s lots of ways to do it and it could cause you to go into a tailspin if you do it the wrong way, you pull it out, you decide that you’re going to invest it into something that isn’t your core business, that all of a sudden took you away from your core business. And and then you’re not where you need to be. Because there is going to be challenges kind of after the first of the year, we’re seeing big backlogs, but I think as people are talking about it, there could be a dip as we enter into the first quarter of next year, as we’re looking at how companies are going to progress, especially if we still have these labor concerns.

Tim Finerty:

I mean, if you don’t have enough people, you’re never going to have the ability to produce what you need to produce. And then you’re going to say, you can, but if you really can’t it’s going to cause the supply chain to even have bigger issues later on. Not about the products, but about getting the products out.

Bryan Powrozek:

Yeah. The couple webinars and podcasts I’ve listened to have kind of talked to that effect, that the growth rate for 22 is probably going to slow. I mean, you’re still going to grow, but the growth rate itself is going to slow down some, so you start to see this plateauing in the market. And so business owners should just, I mean, not get scared by that, but just know that it’s potentially going to be out there. And you might not see the pipeline filling up as much as it normally does, but if you do see that, take those opportunities to continue to reinvest in the business, refine your processes.

Bryan Powrozek:

The one lesson I personally hope that we don’t lose from the last two years is the innovation that took place on the spot when we had to. We had to figure out how to get people to work remote, we had to do all these other things. Business owners need to keep that mentality going into the next year to continue to adjust. They can’t just fall back into business as usual.

Tim Finerty:

For sure. That’s a great point. What COVID has allowed business owners to do in some ways is to innovate, you had to think about that. Now what’s going to happen is you’re trying to hire are a ton of people and get those people up to speed. And as we all know when you’re hiring new people, there’s a learning curve. And so if you’re not doing your training and development correctly, it could cause you major concerns and losses in your business.

Tim Finerty:

So as you talked about innovating, I think innovating one of the biggest things, especially because you might be bringing people on different ways too. I mean, in a manufacturing setting, they’re going to have to come into the shop, but in a non-manufacturing setting, it could be remote. How are you training and developing those people remotely to help you do what you need to do in the right way of where your business needs to go. If you don’t do that, it could end up costing you a lot of extra dollars. Because you’ve brought on new people and are they providing the same value that you had prior to COVID. Right. And that, again, goes with the same thing of how you’re innovating. What is the innovation that you’re doing to help you grow your business in the sectors that you’re looking at. And those sectors might be more service type revenue compared to manufacturing revenue or what is it. Maybe that’s the key, I mean, a lot of our clients that are system integrators have some installation type stuff. Well, if they are able to, let’s say, hire some people that are installers in some ways, in the markets where stuff is shipped it could save them money too. Instead of having to send someone out and stay somewhere for a month. Mentally, that’s a different state of being away from home.

Tim Finerty:

Whereas if they are close to where the project’s at, and they go home to their family every night, they’re they don’t feel like they’re missing anything, and they got that work life balance and different things like that. So, I think there’s a lot of potential opportunities there too, but again, it has to be thoughtful. You have to think about what works the best for the company. If we think about a CPA firm as well like [inaudible 00:25:25] that can work at times, but if you’re trying to be a team there’s a lot more that has to come with that. And how do you work remotely as a team the right way. Certain people want to be side by side, other people don’t always have to have that.

Tim Finerty:

And, really that gets back to then taking that step back as we talked about in a previous podcast about strategic planning. Really understanding your company, your culture, all that stuff, because that’s going to bring really to reality what needs to be done. And as a owner, or as a president of a company, you have to understand that, you can’t look at those things in a vacuum. You have to really take that step back and really see the whole picture and how it’s going to impact everyone, and everyone is different. And we know that, we can see that every year when there’s elections or different things like that, it’s 50-50 on both sides. And when you look at how people look at themselves there’s a lot of similarities in it, but there’s still differences in everyone. And you really have to understand those differences and how do you play well with each other?

Bryan Powrozek:

Yep. And the interesting part about that to me is, whether you’re talking about it in the HR arena, you’re talking about it in the, what’s our product mix or [inaudible 00:27:23] going to be? Really that’s about the only piece of advice you can give a business owner in times of uncertainty, is to know who you are, to know where you want to go, and then be willing to adapt and adjust as things come in.

Bryan Powrozek:

I think that that’s what, and I’ll focus this on the personnel arena, because that’s I know an area that you’re personally very passionate about and have talked with our clients quite a bit about, you’re hosting a video series related to talent and retention and how integration companies can continue to grow in that area is that it’s as you start looking at these alternative things of, “We’re going to bring in this new skillset,” or, “We’re going to allow more remote work,” or, “We’re going to do some of these different things.”

Bryan Powrozek:

Now the business owner can’t continue with just business as usual of, “Oh, we go to these colleges to recruit these types of people. And these are the types of things that are important to controls engineers or electrical engineers.” You’re going to have to shift that, but you still need that core guiding principle to say, “Hey, this is what our business is… Holds our values. This is where we want to see the business go.” And now we’re going to execute things that are going to help us get there. And then sticking back to those core values helps you make some of those decisions in times of uncertainty.

Tim Finerty:

Again, that’s exactly right. The people that you have in your organization, you want them ultimately to be part of where the culture is. Everybody that’s in there, getting back to that training and development, if you got good people, good people will take the reins of potentially saying, “Yeah, you know what? I might like this area, but I don’t know anything about it, but let me learn it. Let me figure out how I can get there.” That’s what I think when we look at businesses that are going to succeed, they’re going to be able to take their people and re-deploy them in the right way. Retrain them, re-energize them, get them thinking about, “Oh yeah. How do I help? How can I be a solution to getting us to where we need to be and out of, ‘We can’t get things done?'” So I think that’s a huge opportunity if the organizations can see that. And I think that’s a huge innovation type thing. When you talk about innovating, it’s innovating within your own people.

Bryan Powrozek:

Yep. Exactly. Exactly. Well, Tim, I guess any final thoughts, as the folks listening to this, as they’re thinking about their 2022 strategic plans, anything that you’d want to put in their ear to think about as they’re putting that together?

Tim Finerty:

The only thing that I would say, when we talk about the economy and how well it’s doing, if you have a good plan, you have good customers, you’re making sure… Even during down times you can be successful. So just making sure that you don’t think that the world’s going to end. Be positive. Look at where you can go and what you could do, as you talked about, innovate. As how do I think about, “Okay. Things aren’t going exactly right.” Or, “We’re struggling with backlog.” Okay, well, what can we do a little different to potentially get there? If it’s trying to hire the right people, it’s trying to bring another… Try to look at merging with other companies, trying to buy, trying to sell, just make sure that you’re taking that time to really figure out what you want to be and continue to go that way. What are you providing that’s more valuable than someone else? And it could be your people. And so, how do you use those things to be better at what you’re doing and continuing to innovate?

Bryan Powrozek:

Excellent. Well, Tim, as always, I appreciate you coming in and spending some time with me. I think you gave some pretty good insights that folks listening to this podcast will be able to take away and use going forward.

Tim Finerty:

Well, thanks. Thanks again, Brian.

Bryan Powrozek:

Right. Thanks.

Announcer:

Thank you for tuning in. Don’t forget to like us, subscribe, and share on social. To learn more about Clayton & McKervey, visit us at claytonmckervey.com. That’s C-L-A-Y-T-O-N-M-C-K-E-R-V-E-Y.com. We thrive on finding the solutions for you.

Clayton & McKervey

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Data-driven decision making: 3 key insights for business owners

What does it take to build a data-driven business? For self-reliant leaders who feel they’ve hit a plateau when it comes to scaling a business, adopting a data-driven approach can be a breakthrough success strategy. Using data in a more focused way helps good engineers become good entrepreneurs. It’s about creating balance. Here we take a look at key insights for business owners when using data in decision making.

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