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What all Must be Included in the Balance Sheet of a Manufacturing Company?
What is a Balance Sheet?
The balance sheet of manufacturing company comprises of the number of assets it owns, along with the capital and liabilities, equity of the owners, etc. at a given point of time, which is generally the year or month-end. In short, the balance sheet shows the owners and the external parties what the company owns and owes.
The reason the balance sheet has been named such is due to the governing nature of the accounting equation, which needs to balance the assets with owners equity and liabilities.
Top Manufacturing Industry Stats
- The U.S. manufacturing industry is the largest one throughout the world producing 18.2% of the world’s total goods.
- As per a report by the National Association of Manufacturers, the U.S. manufacturing industry produces products which equate to $1.8 trillion yearly.
- The gross domestic product contribution of the manufacturing industry is about 12.2% of the overall GDP.
- As per the Bureau of Labor Statistics, U.S. constitutes of 12.75 million of jobs for the manufacturing industry.
- As per the Bureau of Economic Analysis, with the amount of $2.33 trillion in 2018, the manufacturing company constituted of 11.6% of U.S. output in terms of economy.
With the above stats, it has been clearly established that the manufacturing industry is capital-intensive. This means that it needs a higher number of assets in order to produce the required number of goods.
How can someone know about every financial detail to establish their importance in the business and make appropriate decisions? It is known with the help of a balance sheet which focuses on each and every aspect of the business. So, let’s get started and learn about what all items on a balance sheet of manufacturing company accounting form an essential part of it.
Top Balance Sheet Essentials
Assets are defined as the resources owned by the companies which can be converted into cash. Manufacturers divide these assets in the form of fixed, short and long-term, current, and other assets. When it comes to the current assets, they mostly include the finished goods and work-in-progress goods, along with the raw materials which are a part of the inventory. The long-term assets comprise of equipment handling like industrial pushcarts and forklifts.
The fixed assets are defined as assets which include heavy machinery which is used to manufacture the products and any building or land in the form of a warehouse and factory which cannot be moved. Self-financing for specific orders of some customers form note receivables and can be considered as ‘other assets’ for the manufacturers.
Accumulated depreciation holds a lot of significance in the manufacturing industry as most of the companies own long-term assets. This accounts for wear and tear, along with the useful life of a long-term asset.
When it comes to depreciation usage, it is all about the way a manufacturer shifts an asset’s cost portion to the manufacturing financial statements of the balance sheet. The summarized yearly depreciation amount in the form of accumulated depreciation is subtracted from the original cost of the asset.
Liabilities in the manufacturing industry refers to financing, which is used to buy the assets in the first place in order to produce the goods. In the form of short-term liabilities, the manufacturing companies mostly show one or more credit lines, which were used to finance the buying of working capital and raw materials.
Working capital is the amount which we get after deducting the current liabilities from the current assets. Advance payments or customer deposits in the form of prepaids are often termed as short-term liabilities. On the other hand, mortgages, machinery and equipment loans are defined as long-term liabilities.
Other Items in the Balance Sheet
Assets in the manufacturing industry in the form of prepaid bills, cash, and accounts receivable, along with liabilities like accounts payable are identical to all the other industries.
Apart from this, equity of manufacturers in the form of retained earnings, paid-in capital, and initial capital contributions hold a lot of importance in the balance sheet of a manufacturing company.
Tips to Improve your Balance Sheet
Reduce Employee Costs
The employee costs form an integral part of the liabilities of a manufacturing company. If you can bring down these costs without affecting the output quality through training or a better work assignment, you can improve your balance sheet in a great way.
Reduce Manufacturing Costs
Underutilised plants, raw material costs, along with spoilage, can bring down the value of the balance sheet. If you want to reduce these costs and also have specialized equipment in place for better output quality, hiring rather than buying such equipment is recommended greatly.
Keep a Tight Inventory Control
When you have a lot of inventory in place, you always carry the risk of getting them lost, obsolete, or damaged. Keep only the exact inventory which you require with a quick inventory backup in case of excess demand. This way, your inventory becomes a cash-generating asset rather than being an unused inventory.
Keep a Tight Utility Expense Control
Utilities in the form of water, sewer, phone and internet, electricity, etc., add to the number of liabilities a manufacturing company owns. By eliminating the less useful or required ones or reducing the excessive usage of utilities can give a positive boost to the balance sheet.
The balance sheet of a manufacturing company is its backbone, and no company can make efficient decisions without maintaining the balance sheet. A positive manufacturing company balance sheet has the potential to take the company towards business growth, while a negative balance sheet can bring down the company’s value in no time.
The various balance sheet essentials described above hold a lot of importance and should be managed effectively. Adopting methodologies, which makes these essentials work towards and not against the growth of your manufacturing company is recommended greatly.
If you find the task of managing the balance sheet of your manufacturing company to be a tedious one, you can opt for other options like outsourcing of manufacturing accounting, which not only provides quality and expertise, but also lets you bring down the infrastructure and operational costs, along letting you focus on business development strategies without worrying for such unproductive tasks.
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