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To grow or not to grow?

18 October 2021

Tom Smith looks at the link between automation and business growth – asking when is the right time to invest in machinery? 

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At some point, every SME owner will find themselves asking the above question. It’s a daunting prospect, one in which that owner knows full well that, in order to grow, infrastructure investment is required. 

Many new business owners may find themselves in this position right now. The statistics show that there was a record number of start-ups during 2020 – over 407,000 – despite the issues that were faced with the pandemic.

The likelihood is that the funding for such a step is coming from the business, perhaps just a short while after it has made money for the first time. At that stage, there is a big decision to make. To grow or not to grow? 

To use an analogy, it is like being sat around a roulette table. The business owner has had a few wins. Black has come in a few times. It’s great. Now, they need to decide whether to put that money back on black again in order to grow what they’ve accumulated. 

Just like with roulette, the more you want to grow that business – the more you play so to speak – the higher the stakes become. There is a reason that, typically, it is harder for machinery businesses, such as Advanced Dynamics, to sell a grassroots level £7,500 machine compared to a £200,000 full-service filling line to an established firm.

Without beating around the bush, it’s a gamble to invest so much on some equipment, knowing that it could fall flat at worst. On the other end of the spectrum, you know that the £30,000 the business is turning over could turn to £150,000 in the next year if you get it right.

So, how does a business owner know it is the right time to take the plunge? Justification. It is only then, and only ever at that point, that automation investment as a growing SME is the right thing to do. 

Striking a balance 
There’s a lot to be said for entrepreneurial flair, but there’s a balance to be had.

At one end, you have an accountant who will want every penny accounted for before they make a decision. Whereas, if you come from a sales background, you are more inclined to go on gut-feeling and do what it takes to win a deal, without taking the time to weigh a decision up.

Making a growth decision fits right in the middle of those two opposites! You need to be able to understand commercial figures, but you also have to be able to understand opportunities and take them when they arrive. 

The reality is that a bank or funder will, very rarely, loan money to a new SME for growth purposes and are deemed, rightly or wrongly, as high-risk businesses.

That puts extra emphasis on having the funds yourself and being in a position to take what will be a generous hit on the balance. Realistically, many owners will be putting everything  on the line if they pursue a high-risk loan, in the hope they will see it return. 

Within the packaging industry, if your investment in machinery is less than £15,000, it needs to see a return-on-investment (ROI) of six months. Anything more than that figure needs to be looked at across a 12-month timeframe. 

Don’t mistake that for not making any money during that time. The business can continue to trade in exactly the same way it was previous and is making the same profits while also paying back on the investment that has been made. 

If you can achieve that, then you can justify the purchase. If the machine is going to eat into the profits of the business and it’s going to reduce the monthly earnings, then your business has not yet hit the point of growth. 

Is your business being held back by a bottleneck? In short, when we talk about a bottleneck, we are talking about something that is holding up a business operation.

As an example, this could be as simple, yet significant, as the capping process taking too long to complete manually. That’s a bottleneck – one that if resolved could make the world of difference operationally and is, often, the barrier to growth.

Addressing that starts a chain reaction. Address the bottleneck and the business can make more products. Once you start making more products, you can commit to making more and taking on larger contracts. This, in turn, leads to more money and company growth.  

Know your bottleneck. Understand what you need to do to overcome it.

Is automation the answer?
The keyword within this sentence is circumstance. Actually, sometimes, automation is not the answer.

For example, you could be a business owner that makes 50 bottles of product a day. Yes, it can be slow and laborious, manually capping and labelling each one, and there’s no doubt that investing in automation would help to more than triple that output in next to no time.

But the investment is not worth it if that business has no intention of growing its current 50 bottles a day and hasn’t got the customer base for it.

Automation, very often, is the right thing, but it really comes down to cost and thinking. 

If you are only producing 50 bottles a day, our advice would be to wait, grow the business further, sweat the assets until you reach the point of making 700 bottles every day and need a machine to take you to the next level. Then the  benefits of automation will be worth it.

It was mentioned at the beginning of this article that it is easier for machinery businesses to sell a £200,000 full-service line than a £7,500 grassroots machine. But even with the latter, the benefits of investing are obvious.

The first thing you get is consistency and accuracy. It removes the inaccuracies that come with the human eye and over a longer period of time, investing in a machine will get a job done more consistently, more accurately, and, in most cases, it will also improve productivity by up to three-fold.

In line with that, it is also freeing up colleagues who otherwise would be doing manual labour work to do more important tasks around the business.

If you are a small supplier making juice cartons, for example, and you are making 80p per carton, the difference from doubling from 1,000 products to 2,000 products can be huge. Your ROI, on a grassroots machine, at £7,500, can be achieved very quickly. 

Final thoughts
Ultimately, everything that has been outlined comes back to one word. Justification.

Whenever we talk about that first level of automation, it is important to know whether you are investing for the right reasons and whether it is justified ¬– and not just because you want to remove an element of labour from the mix.

As a business owner thinking about growth, ask yourself some important questions: How much product are you making? How many changeovers are required? Have you got the customer base and demand for potential growth? Do you have a bottleneck holding you back? Do you have the finances to back up your decision? Once you have answers to those questions, you are left in a reasonable position to say whether a business is ready for automation. 

Regardless, though, there will always be an element of risk in that decision, but if you are in a position where you can tick the boxes and confirm, with evidence, that you have the customer-base, that if you make more product it will be bought, and you have the finances to invest, that is the time to grow. 

Tom Smith is managing director at Advanced Dynamics.

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