The accounting department plays a critical role in any manufacturing business. It provides essential financial information and advice, helps prevent fraud, and ensures compliance with regulations.
A competent accounting software solution can help with the many challenges facing manufacturers. Such solutions enable automation, intelligent reporting, and built-in integrations with finance software providers.
Manufacturing companies must balance an inventory needed to meet customer orders against the cost of holding that inventory (material and cash). Effective inventory management helps reduce these costs by minimizing the time it takes to convert partially or finished products into sales. This is accomplished by manufacturing accountants through forecasting, planning reorder points and quantities, and establishing processes such as cycle counting to ensure that the inventory number in the accounting system matches the physical stock on the shelves. Studies on inventory management practices and competitive advantage show a strong link between operational speed and profitability. Inventory forecasting also improves financial performance by helping manufacturers predict when to replenish their inventories, allowing them to purchase goods at a more favorable price.
Cost of Goods Sold (COGS)
Your COGS is an important metric because it tells you how much you need to charge for your products to cover your costs and make a profit. Knowing this, you can set prices with a healthy profit margin and avoid overcharging customers.
Unlike operating expenses (which include selling, general, and administrative costs), your COGS only includes the cost of goods you sell to customers during an accounting period. This includes materials, direct labor, the wholesale price of the goods purchased for resale, container and packaging costs, overhead, and storage costs. Your COGS can be found on your income statement under sales, and you subtract it from revenue to find gross profit. This figure is also listed on your balance sheet as ending inventory.
Profit margin is the percentage of revenue a company retains after taking out the cost of goods sold and operating expenses. It may also account for other costs like interest and taxes. It’s the most important metric for investors.
A high-profit margin indicates that a business generates more money than it spends and that its operations are efficient. However, companies should be cautious not to get complacent – a lower profit margin could indicate that a competitor is offering better pricing or has found an innovative way to reduce costs.
The accounting department tracks and records a company’s financial transactions. They also prepare tax reports and oversee investments. They are essential for a manufacturing company to have accurate and up-to-date records.
Cash flow is the net amount of liquid that comes into and moves out of a business daily. It includes incoming cash from different activities and outgoing cash payments. Operating activities include:
- Incoming cash from selling products or services to customers.
- Cash from credit sales.
- Cash from the disposal of fixed assets that have reached the end of their economic life.
The results indicate that decreased cash flow metrics positively improve firm performance. By considering firms’ leverage, the study determines that low-leverage industries are healthier to cash flow metrics changes than high-leverage industries.
The profitability margin is a company’s profit relative to its total sales revenue. This metric is important because it allows manufacturers to see whether they are making enough money from their products or services and whether there is room for improvement. The profitability ratio measures the percentage of profits earned from sales, considering the cost of goods sold, operating expenses, selling and administrative costs, and financing expenses. It is one of the most important profitability metrics for businesses to keep track of and improve over time. A high profitability margin can help companies reduce operational costs and increase competitiveness in the marketplace. This can also help companies increase their customer base, grow their business, and ultimately achieve their goals.
Keeping an eye on your variable expenses can help you make smarter spending decisions and save money. For example, if your utility costs are spiking, you may find cheaper water or energy bill rates by shopping around for quotes.
Variable expenses are incurred by your business when you produce goods and services, including raw materials, production costs, delivery costs, packaging, and labor tariffs. These vary with the number of units produced, unlike fixed expenses that remain the same regardless of production levels.
Everyone knows fixed expenses: bills that remain the same from month to month, like rent and insurance. They’re dependable and consistent, making them the easiest to include in a budget. Unlike variable expenses, which fluctuate with production output and sales, fixed costs do not. They are reoccurring, non-production-related expenses that are important to any business. Fixed expenses include rent, property taxes, insurance, and utilities. An accounting department can track recurring expenses and recommend cost-saving measures. This can be as simple as turning off the lights or switching to cheaper energy sources when not in use.