You are a CFO for a company that manufactures custom designed factory automation equipment. Each machine that you make is a contract for which the company had to compete in a bidding procedure. As a result, the gross margin for each contract varies; some have gross margins that are extremely high while others just barely cover manufacturing expenses.
The company tries to manage their profitability using gross margin. Historically, you have tried to keep the ratio of gross margin to operating expenses at 2.0. In order to help the factory managers manage the workflow, there is a board on the shop floor, which shows each contract with their associated costs and contract price. In this way the factory can make timely decisions on which contracts have priority.
You have been analyzing the financial numbers for the last few months and find that the company has been losing money over the period. Consequently, you have been using the company’s line of credit to keep operations going. You have discovered that if the trend continues you will max out the company’s line of credit shortly.
You just received a phone call from the banker who also knows that the company is near the maximum amount allowed on the line of credit. He has asked when the bank might expect the company to start making payments to decrease the outstanding balance on your line of credit. You insure him that the company will break even this month and return to profitability next month.
When you go down to the factory floor you are contemplating what you can tell the manufacturing employees to help alleviate the financial situation. What changes to your operations can you make in the short term to turn things around by the end of the month?