Business Essentials: 'Furnace contracts have put our plans in the melting pot'

New orders are pouring in at Omega Foundry Machinery, but should it risk cranking up its resources? asks Kate Hilpern

Anyone who has run a business will know what it feels like to daydream about customers rolling in like never before. For Mark Feynes, managing director of Omega Foundry Machinery, the daydream has become a reality but the change has come at a cost.

Anyone who has run a business will know what it feels like to daydream about customers rolling in like never before. For Mark Feynes, managing director of Omega Foundry Machinery, the daydream has become a reality but the change has come at a cost.

Based in Peterborough, Omega is an established company that had been looking to win bigger contracts. "Now we have started to win them, how do we handle the increased business as it's above our current capacity levels?" he wants to know.

Mr Feynes bought Omega in 1996 in a management buyout. At that time, the company's markets were small to medium- sized traditional foundries, and Omega's role was to supply them with the equipment they needed in order to make the ferrous and non-ferrous castings which are used in general engineering industries.

"About 70 per cent of Omega's turnover was in the UK and 30 per cent was export when I took over the company," explains Mr Feynes. "But what's happened in recent years is that environmental concerns, coupled with the UK's higher manufacturing costs than those of developing countries, have resulted in a migration of production of castings to the East."

Consequently, the foundries that Omega supplied in the UK became less and less competitive and many closed down. Realising that it had to respond to this erosion of British markets, Omega refined its focus on its traditional export areas and also decided to explore the emerging markets.

"In order to do that, we needed to redefine our product range," says Mr Feynes. "We needed to change from supplying a fairly specific range of products to widening and developing our portfolio quite extensively."

The result has been that orders have started pouring in for industrial equipment ranging from sand mixers to moulding systems. And, what's more, the value of Omega's contracts - which used to be worth from a few thousand pounds to around £100,000 each - has shifted dramatically to anything up to £1m.

"Our turnover has been hovering around the £3m mark, and for this year we are already 40 per cent above target with a projected turnover of £4.5m," Mr Feynes explains.

Little wonder that he and his 20 staff are all working to their absolute limit and that Omega has brought in contractors to help out, as well as hiring additional premises and equipment. The problem is that while the upturn has been dramatic, the market can be fickle, and Mr Feynes can't be sure if the new business will last.

"So," he asks, "my dilemma is, do I ride the wave and make adjustments with people and premises, in order to take care of increased business in the short and medium term? Or do I accept that a downturn in business could happen at any moment, in which case any major investment in the business would be a potentially foolish risk?"

The decision needs to be taken quickly, Mr Feynes believes. "Current adjustments, like overtime and bringing in contractors, are expensive and potentially erode projected margins," he says.

The last thing Omega wants to do is turn down business, especially after investing so much in developing its products and markets. "But at the same time," says Mr Feynes, "we want to be realistic about how much we can take on."

www.omegafoundry-machinery.com

WHAT THE EXPERTS SAY

Andrew Smith, financial consultant, Towry Law

"Omega has the same dilemma facing many companies when they have to deal with orders larger than their current capacity levels: the resources can't already be in place to deal with increased sales because, if the deals weren't secured, the money invested would be wasted.

"Unfortunately there's no magic solution, as ultimately there is an element of speculating to accumulate. This can leave a previously profitable company in severe financial difficulties if a buyer becomes insolvent or defaults on repayments.

"This is where insurance can help. The non-payment risk for goods or services supplied to a customer on credit can be covered.

"A credit insurance policy can indemnify Omega against such risks on either a selective basis or for the entire debtor ledger - for both UK and export transactions. Mr Feynes can then invest in expanding Omega, knowing that this ledger is secure."

Ian Jordan, vice-president, technology services, Capgemini UK

"Focus on two things: short-term delivery/risk management and longer-term planning.

"Business will dry up quickly if you are unable to deliver on your product line or you do not manage the risks associated with international trade expansion and an extended portfolio. Get the right skills into the business to ensure that production delivers and commercial risks are mitigated.

"You should try to do this as economically as possible, with the emphasis on flexibility rather than immediate investment. The focus has to be on over-delivery (top quality, on time, with excellent after-care) even if there is some margin dilution. Earn the credibility to do more.

"In the longer term, you should analyse the sustainability of this international growth and the profitability of an extended portfolio. Get help to develop a business case for investment. Take the time to rethink the model and bring innovation to the way you produce, brand and deliver into these markets."

Julian Turner, relationship director, manufacturing, Barclays Bank

"Breaking into overseas markets is a tremendous achievement but it brings challenges. Maintaining quality and meeting expectations are vital for future orders, and the company needs to ask itself some questions.

"How do we fulfil customers' objectives? Which orders are new or repeat and are there patterns? Could we subcontract, with Omega focusing on higher-margin products? Where do we really make money?

"Omega's sensible flexible overheads strategy affects short-term profitability but could be sustained while establishing views on the future and attracting new customers. Decisions can then be taken on long-term investments including premises and technology. Margins could then improve.

"Omega has increased orders in both size and number, with the additional risk of exporting. It should work with its bank to find financing solutions to aid and protect profitability and cashflow. Additionally, it could make use of support from the Manufacturing Advisory Service and Business Link [managed by the Department of Trade and Industry]."