Linkedin
Facebook
Email
more
Navigating revenue volatility
Revenue across the manufacturing sector is becoming increasingly unpredictable as consumer preferences shift at speed. From changes in product design to sustainability expectations and technological disruption, demand patterns are proving harder to forecast and more susceptible to sudden swings. For finance teams, the impact of that volatility extends past commercial concern, with direct accounting consequences, particularly for property, plant and equipment (PPE).
When sales soften or product lines lose traction, the expected returns from production assets come under pressure. If cash flow projections deteriorate, businesses may find that assets carried on the balance sheet no longer reflect their economic reality. In some cases, this could render equipment obsolete or now with expected returns lower than their carrying value.
One of the clearest warning signs appears in forward-looking cash flow projections. A primary red flag is when cash flow projection from the use of an asset or a group of assets (like a plant) sits below the current asset value in the balance sheet.
Further, a consistent decrease in the pipeline for orders or evidence of production volumes remaining below capacity due to lack of demand can indicate that the value of an asset, or a group of assets, may be lower than what they have in the balance sheet.
Flexibility versus obsolescence
The speed at which demand patterns can change raises a question: how should manufacturers assess whether their PPE is at risk of impairment? The answer lies partly in flexibility. Equipment that can be redeployed across multiple products or markets offers a buffer against volatility, while highly specific assets tied to a single declining product line are more exposed.
Manufacturers therefore need to examine not only utilisation rates, but also their strategy, plans for capital allocation and the adaptability of their production lines. Where machinery can support different outputs, the risk of it becoming idle and impaired is reduced. By contrast, single-purpose assets linked to shrinking demand may quickly become stranded.
Rather than serving as a forecasting overlay, models can gradually morph into pseudo-ERP systems, attempting to track complex supply chains, inventory movements and operational detail. At that point, risk multiplies, confidence erodes and the model’s original purpose is lost.
It really depends on how flexible they are. If plant and equipment is, or can be, used in the production of different products, it decreases of the risk of impairment.
When does volatility trigger impairment?
Distinguishing between short-term volatility and long-term structural change is a difficult call for boards and CFOs. A cyclical downturn calls for careful consideration, while a permanent shift in technology or consumer behaviour could demand decisive action. Strategic alignment, particularly around capital expenditure, becomes critical.
In some instances, rapid technological changes can render existing equipment inefficient. In those cases, holding on to legacy assets may destroy value rather than preserve it.
If impairment indicators exist, such as recurrent negative cash flows from operating activities, finance teams must undertake an impairment testing to determine the recoverable amount of an asset. The Australian Accounting Standard 136 Impairment of Assets define the recoverable amount as the higher of an assets, or cash generating unit’s fair value less costs of disposal and its value in use.
Determining the fair value of plant and equipment can be challenging. Where reliable market evidence is unavailable, companies must rely on a projected cash flow modelling to determine the value in use of it.
If the impairment test confirms that recoverable amount of an asset, or cash generating unit, is below its carrying value, the asset must be written down to its recoverable amount, and an impairment loss should be recognised. Importantly, in many cases the impairment test confirms that assets remain recoverable, even amid short-term turbulence.
Balancing risk and capital allocation
For boards and CFOs, the challenge is balancing the risk of impairment against the need to invest in new technology. A key point is to understand the trends of the market. If directors have an understanding where demand is heading, they can make decisions about investing in new equipment and technology confidently that investment are made where long-term growth is expected.
In sectors driven by rapid technological evolution, the window between innovation and obsolescence can be narrow. Careful capital allocation, grounded in market evidence and scenario analysis, is therefore essential to avoid investing in assets that will not provide the expected returns.
How RSM Australia supports manufacturers
Against this backdrop, advisory support can play a decisive role. RSM Australia draws on more than 104 years of collective experience to help businesses navigate volatile economic conditions. From tax debt and rising interest rates to inflation, labour shortages and complex government policies, manufacturers face layered pressures that compound revenue uncertainty.
RSM works collaboratively with its clients to understand their challengers and support them in successfully navigating the domestic and international challenges of the manufacturing sector. By combining its expertise in accounting and corporate finance, RSM supports businesses in impairment assessment and analysis and testing for impairment, as well as providing modelling and advise to help manufacturers to make strategic decisions across daily operations, budgeting and forecasting, strategic planning, and complex transactions. Our goal is to help businesses to reduce costs, boost efficiency, and increase profitability.
This article was first published in the Manufacturers' Monthly
