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#7 – Investing in production optimisation

10 October 2019

Every week we take a look at a ‘Moment of Life’. In the seventh blog about our Moments of Life we talk about optimising a company’s production.

Optimise your production

Digitalisation, transformation and optimising production have one thing in common: all these Moments of Life facilitate more efficient work. We create a distinction between these growth moments, because they all take a different approach towards reaching this goal.

Optimising production is mostly relevant for the manufacturing sector. A manufacturing company can logically increase their profits by either reducing the costs, or increasing the selling price of their product. Optimising production entails investments that reduce the direct and indirect production costs or increasing the production capacity.

A company reduces direct production costs, by the decreasing the costs of the direct material, labor and expenses that are used to manufacture the end product. A company can, for example, invest in machines and automate part of the production process. Thereby, a company can better plan and tune their production process. Besides, automated production processes are less prone to error and result in less waste.

A company can reduce indirect costs, thus costs that do not contribute to the end product directly, by investing in new machines that use less power and are more energy efficient, for example. Another, more obvious benefit of automation for a company is reduced labor costs. Less labor is required to manufacture, from the person working on the product directly to their supervisor.

October is an excellent place for a loan for an investment in the optimisation of the production process. We have done multiple loans for this Moment of Life, including G.M. Cataforesi, who borrowed €600,000 to finance investments in their powder coating factory that increased their production capacity.

Analysis by the credit team

As said, the optimisation of a production process increases the profitability of a company. However, it is also crucial to keep a company operational. Margins between the cost price and selling price should be at an acceptable level. These margins affect the price of the product in comparison to competitors and therefore the position of the product within the market.

In the credit analysis we judge how an investment in the production process will impact the turnover and operating margins in the long run. A higher margin means that a company has a higher capacity to repay its loan. In the analysis we critically look at the actual added value of an investment. But, we also zoom in on risks of investing in a suboptimal effort, or even an investment that will negatively influence the overall performance of a production process.

At October we can tailor the mode of financing to the needs of the borrower. Besides loans, we have the possibility to offer a leasing product. This leasing product is especially interesting for second-hand equipment. With lease, October is the owner of the asset and the borrower ‘leases’ the asset from us. The borrower has the option to purchase the asset at the end of the contract. Unfortunately, due to regulatory restrictions, the leasing product can only be financed by the October fund. Private lenders cannot invest in leasing projects.

– Alexander from the Credit Team in Amsterdam

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