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Manufacturing

INVENTORY STORAGE? Proceed with caution.

INVENTORY STORAGE? Proceed with caution.
Since 2017, days of inventory have increased for manufacturing firms nationwide, which means inventory storage has also increased.  Days of Inventory in 2019 hit 59, up from 53 in 2018, and 51 in 2017.  Mathematically, a decrease in the cost of sales could be causing this.  COGS have actually increased slightly from 75.80% of revenue in 2017 to 75.98% in 2019.  This indicates that firms have an increasing amount of inventory.  Assuming this is not an over-production issue, firms are not selling as much as years prior.
This could be interpreted as a sign of economic slowdown, even before the Covid-19 storm made landfall.  The increase in inventory may lead some businesses to think that they need additional space, which they may have a legitimate need for, but if the underlying reason is because of a weaker economic environment, the right course of action for the business to take might not be committing to a new long-term lease.  Companies that absolutely need to move product offsite may want to explore third-party warehousing as an option.  It is not as cost-effective as leasing traditional warehouse space on a per square foot basis, but allows the end-user the flexibility to change on a month-to-month time horizon.
The global health crisis has further complicated the situation.  Some manufacturers now cannot keep enough stock to satisfy their customer’s needs.  This may temporarily reduce the need for additional storage, even though it would be financially feasible.  As with most circumstances, each should be evaluated on a case-by-case basis.
Source: Bizminer.com
Written by: Joseph Schultz, East Team Associate

WHAT IS YOUR RENT TO REVENUE RATIO?

What is your Rent to Revenue Ratio Image

WHAT IS YOUR RENT TO REVENUE RATIO?
One financial metric that many business owners are unfamiliar with is the industry rent-to-revenue ratio (I-RRR).  The math is simple; rent paid divided by total revenue from operations.  Naturally, some industries will pay a higher percentage of their revenue in rent; a retail shop will surely pay a different percentage of revenue to rent compared to a small law firm.
So what is your I-RRR?  With data collected across the entire nation, manufacturers, on average, paid 1.78% of their total revenue from operations toward rent.  In 2017, they paid 1.87%; 2018 they paid 1.77%; and in 2019, they paid 1.69%
The amount of rent a business must pay involves many factors.  Location, site access, building quality, and, most importantly, market conditions are all factors.  A business in New York City will certainly pay more in rent while a business in rural Minnesota may pay less.  The formula is simple, but the underlying factors can be quite complicated.  Many companies believe their I-RRR should be much lower during this economic slowdown.  However, the dramatic drop in rents that occurred in 2008-2009 has not happened…yet.  It is possible that large-scale business closures create urgency on behalf of landlords to make low cost deals, but it is not happening now.  Stay tuned for more market information as we near the end of 2021.
Source of Data: Bizminer.com