5 critical issues facing manufacturing companies

5 Critical issues facing Manufacturing companies


An article by Drew Coles a member of the Chartered Institute of Management Accountants.

Manufacturing

Small Manufacturing companies face a number of issues. We will run through 5 of the most critical in this article and reveal some of the best ways to reduce them and help your business thrive.

Stock control

Stock Control and Valuation

Problems with stock control is caused by the sheer volume of materials and tooling being purchased by the company to complete customer orders.
Keeping a track of the valuation of stock is important for you as you can then see the value of working capital in the business.
This is also important as it enables you to track usage of each which we will get to later in the article.

Cashflow

Because of the large amount of purchases Manufacturing companies must make in order to fulfil customer orders there is usually a long time between the purchases and customer payment which strains cashflow, this is before taking into account late customer payments.
Therefore it is important to produce a detailed forecast for company cash and highlight times when the bank balance is short to find alternative funding. We also promote excellent credit control and invoice customers as soon as delivery is finalised to reduce payment times.

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Wastage in production and inefficiency

Using more tooling and material in production than necessary can lead to several hundreds of pounds lost. In order to ensure you keep waste to a minimum its important to keep track of your usage and implement corrections before they become an issue.
Also, time taken to machine parts is a big factor. The more parts you can machine to the correct quality is important to increase capacity and take more work on which will increase sales and profits.
In order to keep track a working spreadsheet is a great idea tracking the amount of material and tooling used over weeks or months. This can also incorporate the amount of parts machined in the period to allow you to see efficiency and wastage in production.

Investments in machinery and ROI

It can be difficult to predict a return on investment from purchases in new machinery. It’s important to forecast future revenue, profit and cash received from new investments to ensure they are a good investment. It’s also important to time the investment well when there is a sufficient cash for the purchase and or the payment of a monthly loan.
We would firstly create a cashflow forecast of the future cash balance after the capital purchase has been made taking into account the deposit payment and future loan payments. This should be followed by a Net present value appraisal to allow you to understand whether the investment will produce a sufficient return.

Investments in machinery

Customer profit

It can be difficult to predict the amount of profit made by each customer. This is especially true when you need to factor in overheads which include wages, electricity, rent and more as well as material and time taken to receive payment. Therefore, it is important to understand how much profit you are generating from each customer to ensure its sufficient. We have experienced times where clients have thought certain customers are profitable but after analysing the figures were actually costing the business money.
Finding a way of costing each customer account is important. We would then allocate the revenues to each account to find the profit each customer makes.

Customer profit

About the author

Drew Coles is a member of the chartered institute of Management Accountants. He has over 10 years’ experience in manufacturing from production right through to finance and Accounting. Using this information has enabled him to combine Accounting services with financial management to deliver a tailored service unique to Manufacturing companies.