When people talk professional services for Manufacturing businesses, often niche services like Grant and Investor Funding, Research and Development (R&D) Tax Incentives, Cyber Security and Risk and ESG, to name a few, are mentioned first.
Written by by Tom Huberli, CA
Before undertaking these very important functions (which RSM can help you with too … but more about that another time), it’s important to get your factory floor ticking the right basic financial monitoring boxes first.
Running a lean and efficient operation is important to all business’s financial return, but no more so than a Manufacturing one where margins are super competitive and industry technology and processes are forever changing.
Ensuring your price meets the value expected by your customers is obviously an important early step. To make sure this pricing supports your Manufacturing business in maximising profits for sustainment, growth and ultimately, owners’ return, you must be on top of your financial indicators like profit margins, return on investment, equity and capital, and cash flow.
These financial return indicators can be measured easily if you have the right guidance.
Then, to pull the levers to improve these financial return indicators, a manufacturer must be alert to 5 of the most important operational KPIs and trends in Manufacturing. These are:
- Interest cover ratio – this ratio measures the business’s ability to fulfil its interest payments. Obviously, financing is an important part of purchasing the capital-intensive plant and equipment needed in this industry. It compares earnings to interest costs. If you can’t get this right from day one, put down the loan application form as you can’t start a good business, or fund growth, with severe debt-stress;
- Budgeted costs and productivity (production hours) trends – seeing trends of increasing costs and / or declining hours can be a warning sign that things are headed in the wrong direction. Applying this to specific areas of the factory, be that departmentally or a specific process, can pinpoint exactly where problems lie so you don’t throw out the baby with the bathwater, so to speak;
- Industry benchmarks around efficiency and pricing – due to continual process and technology improvement, Manufacturing is impacted more than most in this area. With pace of automation increasing quickly and process development constantly underway through principles such as Lean and Kaisen, Manufacturing is no place to set-and-forget. Knowing when and where you may be lagging in terms of pricing and therefore, possibly, efficiency or wastage reduction is vital to react and adapt;
- Inventory turnover & Work in Progress (WIP) movement – holding stock and WIP for an extended time is a drain on a Manufacturing business’s profit. Increasing carrying costs like warehouse, insurance and finance costs add cashflow pressure where revenue is not increasing in accordance with the cost rise; and
- Utilisation and Capacity – utilising machines and resources with little to no downtime can be a goal in some circumstances of exceptionally large contracts and operations. But keeping machines running at all times may not be the right outcome where building exceeds need (see above Inventory and WIP movement). Having machines run at the right time, load managing resources and queuing jobs effectively can improve profits with lowered overtime wages, reduced operating costs and better on-time delivery.
Narrowing this down further and understanding the above indicators per department or production area, client or even job can become enormously powerful.
However to be able to monitor the above areas, and more, manufacturers need good quality financial and other quantitative data to start with. Data that is complete, accurate, consistent, and timely. Rubbish in, rubbish out / Quality in, quality out! You choose.
RSM is able to assist in getting your data in order at factory floor level.
Then come the niche services … stay tuned.
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