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How to Manage Balance Sheets for the Manufacturing Industry?
The manufacturing sector is one of the major industries of the world. Small to medium to large-sized manufacturing units are creating everything that you can think of, from clothes to needles, steel, electronics, computers, food, petroleum, and more.
Although, manufacturing businesses differ significantly in their niche, they bond together when it comes to maintaining, tracking, recording, and calculating the numbers on a regular basis. In other words, preparing and managing the balance sheets provide a clear estimation of a company’s assets, capital, and liabilities over monthly, quarterly, and yearly basis.
However, many manufacturers fail to manage balance sheets due to multiple reasons- lack of time, resources or knowledge- thus, affecting the overall productivity of this industry. So, here in this article, we are sharing some smart tips that manufacturing businesses can adopt to manage their balance sheets efficiently:
1. Total Labor Charges Calculation
In order to calculate the total labor charges for the balance sheets, you need to step into the shoes of human resources. It is not just the labor salaries that go into account while preparing the balance sheets but also the cost of benefit packages.
Due to a consistence change in the direct labor costs, calculating the same regularly provides an accurate idea of the current expenditures. In order to avoid needless costs like scheduling conflicts, overtime, and absenteeism, it is extremely important to have total control over your labor costs.
2. Proficient Inventory Control
Too much of stock leads to great bearing on the balance sheet due to inventory control of your business. This leads to a few risks with inventory becoming damaged, obsolete, or lost with an increase in inventory. When inventory gets hold more than required, the capital gets tied-up, making it an underperforming asset instead of a cashflow generator or financial stability booster.
Inventory production is the sole purpose of manufacturing as they are the products completely ready to be sold. The current market value should be in compliance with the updated inventory total and the market price change reflecting in the balance sheet. When inventory value is estimated during the accounting for manufacturing company, it helps greatly in generating future revenue.
Irrespective of the inventory type like raw materials, in-process, finished goods, out-dated, calculative steps should be taken to manage the inventory in such a way that it paves way for the profits and not losses at any cost.
3. Underperforming Assets Assessment
The assets are clearly classified as non-current and current assets. The current assets are those which can be cash-converted in less than a year like inventories, cash, and net receivables. Non-current assets are the assets which need no action till one financial accounting year.
It is better to liquidate the assets if they are not providing a solid return. For example, putting in a lot of capital to hold assets that are hardly used on a regular basis do not bring great benefits but leads to over-burdening of the balance sheet.
Production outsourcing and machinery leasing leads to cost saving, especially when the machinery is used sparingly. Balance sheets help greatly in discovering the same and making the required changes.
4. Regular Manufacturing Costs Check
Keeping a tight hold on the production costs is extremely important if your business is operating in a competitive and aggressive manufacturing space. Less-utilized machinery and plant, spoilage, along with the raw material costs lead to a risky balance sheet.
This makes it evident for the small business owners to outsource manufacturing equipment rather than investing a lot of capital as doing the opposite is surely a risky move. Outsourcing brings down business liabilities at large by decreasing the risk investment for specialized functions.
5. Direct Material Costs Calculation
After establishing the accounting method, determining the production costs of the direct materials is the first step. For example, the cost of blinds for a business interior company. The step-by-step procedure includes making a list of the number of units bought and the raw materials.
The next step is to multiply every raw material unit price by the total number of units, providing you the direct material cost. When such expenses are tracked, you are able to manage manufacturing accounting’s inadequacies.
6. Careful Balance Sheet Debt Management
The following are the biggest approaches adopted by MNCs:
- Borrowing in contradiction of ‘assets’ fair value’ with ‘capital concentrated investments’ forms the risk-factor in the coming times. The risk of re-translation is accurate here since the exchange rate closing for the reporting phase translates both the functional currency debts and foreign subsidiary overseas assets. Perfect alignment of the effective currency of debts and cash flow plan delivery results in the protection of debt in relation to the value of the assets.
- Borrowing in contradiction of earnings or cash flows with the business having a small asset contribution and shareholder value deeply in relation to the generation of the cash flow. Here, the earning levels are aligned head-to-head with the effective debt currency but the difference in the exchange rates used for re-translation of the two contributors into a powerful ratio fails this approach at large. So, it greatly depends on the type of industry and their approach to taking risks when it comes to managing the balance sheet debt.
7. Utility Expense Track
Tracking of the utility expenses is of extreme importance and should not be overlooked at all. Phone and internet services, water, electricity, sewer, etc. are some of the very common utilities used by a business.
Apart from these, purchasing of software for IT automation or business intelligence adds to the total number of utilities and tracking of these utilities makes a lot of difference when it comes to the balance sheets.
8. Management of Capital
The working capital is the difference between any company’s current assets and liabilities. This current ratio clearly tells a company how much cash they will need in order to grow by leaps and bounds in the future.
If you have a ratio above than 1, you are definitely on the healthier side of the financial state. So, in order to have this ratio always above 1, make sure you are working hard to keep your current liabilities lower than your current assets and the balance sheet is the actual eye-opener for this.
9. Depreciation Expense Management
A definite amount is lost when you use your fixed asset such as a vehicle, machinery, or any of the office equipment. A good way to lower the depreciation expense during accounting for manufacturing company is by increasing the life of the fixed asset.
For example, if you are using machinery whose life is around 5 years and you increase its life by another 5 years through upgradation. This way the depreciation value comes down for the fiscal year.
When it comes to the land, it is not depreciated as the amount of purchase gets added to the balance amount. For example, if you buy a building worth $600,000 and the balance amount remaining is $1,000,000. The new balance amount will be $1,600,000 ($1,000,000 of balance amount + $600,000 of the building).
10. Latest Software Usage
With the growth in automation, financial management has been streamlined through the use of efficient tools and software with managing the following becoming a cakewalk:
- Collections and credit management, lockbox, accounts receivable
- Electronic funds transfer, automated order matching, accounts payable
- Allocations, general ledger, eliminations and consolidations
- Bank reconciliation, cash management, statement interfaces
- Fixed asset, tax management, payroll
- Planning and forecasting, budgeting
Some of the most popular software in the manufacturing industry are:
- Zoho Books: Best for growing businesses looking for online accounting
- DEAR Inventory: A preferred one amongst SMBs for inventory management
- Xero: The perfect accounting software when it comes to SMBs
- Cosmo Lex: Web-based software for accounting and legal practice management
- Sage Business Cloud Accounting: Invoicing and cloud accounting for small businesses
These are just a handful of some of the top professional software available online. However, it is extremely important to read the balance sheet regularly as more familiarity with the company’s reports makes you capable and competent to address every kind of small and big problems related to managing the balance sheets of your manufacturing business.
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