Running a manufacturing business is complex and keeping control of the finances is no exception. Although most manufacturing business owners understand the need for compliance and financial accounting, the benefits of strategic financial management may be less obvious.
Manufacturing is a cash-intensive business and cash could be tied up in working capital for weeks or months making it vital to have accurate record keeping and in-depth analysis to enable managers to make informed business decisions. It’s not always possible to turn around a decision quickly, so careful planning enables you to avoid costly errors.
Let’s look at some of the business areas where you can run into trouble if you don’t have a good handle on your numbers:
End-to-end supply chain requirements
End-to-end involves the entire supply chain process, from product design and procurement of raw materials, manufacturing and delivery of the final product as well as post sales customer service. End-to-end supply chain best practice involves building collaborative relationships with your suppliers where you are all working towards the same goals. You may be importing and exporting goods, so that can come with additional legal and financial complications which means it’s vital to understand, record and accurately track your figures.
Tooling and NRE costs
NRE (or Non-Recurring Engineering) and tooling are unavoidable costs of manufacturing new products or enhancements to existing products. NRE, which includes tooling is the one-time cost to research, design, develop and test a new product. The NRE cost needs to be included when looking at the overall profitability of a product as these costs can be prohibitively high. Without a clear understanding of your non-recurring engineering costs, you could make a costly decision to continue production of a product that is loss-making. It’s not uncommon for new manufacturing businesses to underestimate the NRE costs for bringing their product to market.
Compliance and quality control
Manufacturing compliance includes the technical, legal, and corporate requirements, regulations and practices manufacturers must satisfy as they produce and market products. When businesses are struggling to remain compliant with key legislation such as GMP within the food, cosmetics and pharmaceutical industries or ISO standardisation regulations in other industries such as engineering or IT technology, they run the risk of expensive fines as well as missed sales opportunities. Remaining compliant with standards for manufacturing and quality enables you to compete in international markets, growing your business globally rather than just domestically.
Raw materials, work in progress and finished goods
One of the biggest costs for manufacturing companies is the materials cost to make products. Thousands of pounds can be tied up in inventory, whether in raw materials, work-in-progress or finished products. Keeping a close eye on inventory levels enables you to keep your working capital as low as possible. Choosing the right inventory valuation method is important as it has a direct impact on the business’ reported profitability. Whether you opt for LIFO, FIFO or WAC, you’ll need to be consistent so that costs can be compared across accounting periods. An outsourced Finance Director can help you to assess which method is most appropriate for your company.
Cost of goods sold and direct/ indirect costs
Cost of goods sold includes direct raw materials as well as direct labour that can be attributed to each product. Having a clear understanding of project accounting can help your finance team to implement cost allocations that improve your ability to calculate which products are most profitable. In times of escalating costs, this can be vital for making quick decisions about whether to drop a product line or increase output.
Production line: Batch production, continuous manufacturing, test runs, shifts and down time
Manufacturing accounting focuses on the fine detail of what’s really happening on the production line. It looks at how to reduce wastage, how to cut your defect rate, how to manage staff shifts, whether to run batch or continuous production and many other aspects of running a factory. Strategic financial management that isn’t afraid to get down into the minutiae of how things really work is a huge asset to your business.
Continuous improvement and customer care.
Creating a thriving business is not just about having a good quality product. These days consumers are savvy and the internet makes it simple to shop around, not only for the best price, but also the best customer experience. A programme of continuous improvement and a culture of customer care will put your company top of mind when customers are looking for your product – price may not be the right differentiator, particularly in times of high inflation.
Reporting beyond just sales, P&L and Balance Sheet.
There is so much to understand to ensure your financial strategy, plans and reports are accurate> That’s why you need a finance partner with over 20 years of manufacturing experience who understands your issues on the shop floor and within the supply chain. Performance metrics, cash flow forecasts, funding options and working capital management are all vitally important and may not fall under the remit of your Financial Controller.
The benefits of strategic financial management for manufacturing businesses
An outsourced Finance Director with a background in manufacturing accounting can provide a whole new insight into the financial health of your business by providing reporting such as detailed variance analysis, cashflow forecasting and tracking, working capital management reporting and appropriate funding options. In addition, strategic financial management can help identify any specific tax breaks, incentives and grants available for your manufacturing business.
Many manufacturing businesses are also at the mercy of the global supply chain and can be impacted by the fast-changing global economy. When you are importing and exporting, a previously successful business can rapidly become a loss-making organisation if insufficient attention is paid to what’s happening with exchange, inflation and interest rates around the world. Using an outsourced Finance Director with many years’ experience, both in the UK and overseas manufacturing environment, allows you to anticipate and mitigate issues quickly.
Your business, whatever its size, can benefit from closer analysis of what’s happening operationally, so you can improve your strategic decision making and plan well for the future. Logical BI can provide strategic financial management support at FD level or can work alongside your finance teams in a consultative capacity to help you achieve your long-term goals. Call 01772 287400 or email hello@logicalbi.com to find out how we can help your business achieve more.
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